What Is Financial Literacy And Why Is It Important For Retirement?

Learning about and improving your financial literacy is never over. There is more to learn at every stage of life, including when you are about to retire. Plus, your financial goals and priorities change over time. Improving financial literacy during the years leading up to retirement and even after you have retired is one of the key steps you can take to ensure better financial outcomes.

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What Is Financial Literacy & Why Is It So Important When You’re About To Retire?

As you get closer to retirement, and even after you have retired, your focus on finances will shift.

Instead of working and saving, you may be ready to leave your job behind for a life of relaxation and travel. Alternatively, you might be looking at downsizing your home or figuring out how to leave a legacy for your loved ones. Preserving your savings becomes more important.

Without proper guidance, it can be hard to navigate these changes effectively. That is where financial literacy comes in.

What Is Financial Literacy?

Financial literacy refers to basic financial knowledge. Do you understand how things work when it comes to the concepts of earning, saving, investing, avoiding debt, and protecting your assets? If so, then you are on the right path.

With this knowledge, you also gain confidence in your ability to apply what you have learned. You will be able to make the best possible financial decisions. You understand that the financial decisions you make today will help you to build wealth for your future.

Why Is Financial Literacy Important?

It may not seem like it, but we face financial decisions every day. We each make individual choices about what to buy, when to pay a bill, and whether we can add money to our savings. It can be easy to spend mindlessly or put off saving for retirement without thinking about the long-term impacts to overall financial health.

We all want to avoid making big financial blunders, however. Even though no one sets out to make a money mistake, it can and does happen. Even worse, an unexpected financial disaster could lead to years of debt. This would make it very hard to reach your financial goals.

Without a full understanding of the importance of earning, saving, investing, and avoiding debt, starting to save for large future expenses like retirement get postponed. Investment options seem scary and overwhelming. Without emergency savings, a sudden job loss or medical crisis can become a financial disaster. Instead of saving for the future, we stay in debt for years.

Unprotected assets put us at even greater risk for financial set-back. Maintaining health through positive lifestyle habits and disability insurance helps protect one of our biggest assets. Yes, your ability to work and earn an income is one of your biggest financial assets.

If you have a partner or children who depend on your income, inexpensive term life insurance is essential. Homeowners insurance, renters insurance, and car insurance all help protect assets.

Financial literacy is important because it helps to inform and guide financial decisions. It also helps you avoid money mistakes and financial disasters. Finally, financial literacy supports you in achieving your long-term goals.

Why Is Financial Literacy Important For Seniors?

According to a joint survey conducted by RBC Wealth Management and City National Bank, baby boomers are the least likely to have had any financial education. About 38% stated they received no investment training. This makes sense because older boomers usually had pensions. Younger baby boomers, not so much. Once deferred compensation plans such as the 401(k), 403(b), and 457(b) gained favor, pensions quickly went away.

Suddenly, baby boomers had to make their own decisions about saving and investing for their future.

There are many changes that come with aging. Some of these changes include lifestyle transitions. There are often questions about retirement accounts and distributions. Another big change is Medicare (and making sure you sign up for it at the right time).

Older adults continue to make financial decisions. Big ones, like taking a dream trip, downsizing a home, or leaving a financial legacy to their heirs and/or favorite charities. Unfortunately, seniors are also susceptible to financial fraud.

While strangers commit financial exploitation of older adults, over half of financial elder abuse incidents are committed by someone familiar. According to the National Center on Elder Abuse, almost 60% of perpetrators of financial exploitation of senior citizens are family members. Friends, neighbors, and home care aides account for almost 32% of financial exploitation against seniors.

Financial literacy is important for seniors because of the many important financial decisions that come with aging. In addition, learning the warning signs for fraud and financial exploitation can help guard against this type of abuse.

The Need For Financial Literacy Becomes Stronger As You Approach Retirement

If you are still working, it is an opportune time to create and follow a simulated retirement budget. Try it for a few months to see if you can live on your projected income. If not, work a little longer so you can save and invest more to grow your retirement nest egg.

Ideally, it is best to start investing early. However, it is never too late to start saving and investing. Better late than never! Any amount of money you save today will help make your future more comfortable. Learn about investment options and associated risks. Study on your own (see resources listed below) or consult a financial advisor.

As you get closer to the point that you will stop working, it is even more important to avoid overextending yourself financially. Continuing to spend beyond what you can afford will lead to increased stress and financial problems down the road. You want your money to last.

What To Do If You Are Facing A Mountain Of Debt At Retirement

Having a mountain of debt can make retirement seem unattainable. It is possible to service your debt in retirement if you have enough income. If you have a pension or enough retirement savings to make monthly payments, it could work out. However, your retirement will be much more enjoyable if you get rid of debt before you retire.

Related: The Debt Snowball Is The Best Strategy For Killing Debt

You might need to work a little bit longer to help you pay off your debts. One advantage of working a couple more years is that you can continue to make contributions to your retirement accounts. This will give you a bigger retirement nest egg. However, even if you are unable to add more money to your retirement accounts while paying off debt, your retirement savings will continue to compound and grow.

How To Boost Your Financial Literacy In Retirement

There are several ways to increase your financial literacy in the retirement years. These include exploring financial sites online, listening to personal finance podcasts, finding a trusted mentor or fiduciary financial advisor, or taking advantage of financial apps to help you budget or tract investments.

Know The Lingo!

When it comes to learning more about personal finances, it helps to know the lingo!

The Consumer Financial Protection Bureau has prepared a glossary of financial terms. This guide can be helpful for understanding financial literacy concepts. Many of the terms in the guide relate to students. However, it is still a useful tool for anyone who wants to gain a greater understanding of financial concepts.

Financial Glossary

The Louis Maygarden Center for Financial Literacy at the University of West Florida also provides an excellent resource on financial literacy basics. They have created an extensive list of personal finance vocabulary words, which you can access in the following guide:   

Financial Literacy Basics and Vocabulary

Both the Consumer Financial Protection Bureau and the University of West Florida have additional financial literacy resources on their sites. Be sure to check them out and explore what they have to offer.

Related: Will Figuring Out Your Saving Rate Help Increase Wealth?

How Financial Literacy Changes Once You Have Retired

Once you have left the work force, the financial literacy concepts you focus on change yet again. During retirement, you are no longer putting away money for the future. Retirement is a time for tapping your savings to fund your job-free lifestyle.

There are additional terms to learn, like Required Minimum Distributions (RMDs), Medicare, IRMAA, and more. You also have to figure out when to take social security and how to make your money last in retirement.

Required Minimum Distributions (RMDs)

You cannot defer taxes forever. In fact, the government will force you to start spending down tax-deferred retirement accounts once you reach a certain age. Required minimum distributions (RMDs) must occur yearly. They come out of your tax-deferred accounts such as 401(k) plans, 403(b) plans, 457(b) plans, traditional IRAs, SIMPLE IRAs, or SEP-IRAs.

However, the SECURE Act (signed into law December 2019) postponed the age when you must begin to take RMDs. For 2022, you do not have to start taking RMDs until age 72, if you turned 70 years old on July 1, 2019 (or later).

The Internal Revenue Service website has examples and worksheets to help you figure out how much your RMD should be each year. If you have your investments all in one place, with an investment advisor or a brokerage, they will usually calculate this for you.

It is important to get it right. You are allowed to take out more than the minimum. However, be sure to take out enough! If you do not take the required amount, the IRS will impose a 50% fine on the amount you should have taken.

Medicare

If you retire before age 65, you will have to purchase your own health insurance. (Unless your former employer provided you with a health insurance benefit in retirement, which has become increasingly rare). If your income in retirement is low enough, you may be able to purchase low-cost subsidized health insurance. Check your state exchange, through the Affordable Care Act (ACA).

Once you turn 65 you can sign up for Medicare, which is usually less expensive than private health insurance. With Medicare, you must sign up at the right time. If you wait too long, your monthly premiums become more expensive. Do not make a costly mistake with Medicare!

Some people are surprised to learn that Medicare is not free. You can lower your cost through supplemental plans, but you will still have to pay for Medicare. It is important to figure out the cost of Medicare so you can plan your retirement budget.

Income-Related Monthly Adjusted Amount (IRMAA)

The income-related monthly adjusted amount (IRMAA) is a surcharge on Part B and Part D Medicare premiums. It affects those with a high income. If you fall into this group, your Part B and Part D Medicare premiums can end up costing more. The deciding factor is your modified adjusted gross income.

IRMAA is calculated on your income from the prior two years, based on your tax returns. Consulting with a financial planner or Medicare specialist can help you explore options for reducing costs.

Other Financial Concerns In Retirement

When you are young, it is typical to focus on increasing income and savings. Managing “the big three” expenses: housing, transportation, and food is a priority. After you retire, some expenses will go down, while others go up. For example, when you first retire your travel and entertainment expenses may increase.

The early retirement years are the “go years” when you may do more traveling. Later retirement becomes the “stay years” when you are less able to do as much. It is common to spend more on dental and health care as we get older, and our caregiving needs increase.

Have a plan for long-term care and for what you will do if you need a higher level of care. Will you be able to afford an assisted living facility? Or can you afford to hire caregivers so you can age in place in your home?

No one likes to think about death, but there are costs associated with it. Arrange for final expenses like your funeral, burial, or cremation before you die. This takes the financial burden off the loved ones left behind.

Mentoring The Next Generation: How Baby Boomers Can Help Others Increase Financial Literacy

Money is a topic that used to be taboo, never mentioned at the dinner table or in polite society. However, it should be! How else will our children learn to get good with money? Is there something older adults can do to help young people become excited about saving for the future?

Financial literacy programs are becoming more common in elementary, middle, and high schools throughout the nation. However, they are not everywhere. Take advantage of the knowledge and money skills you have developed. Pass them on to your children and grandchildren to increase their financial literacy.

Summary

Financial Literacy is a life-long learning process. Continue to learn about money basics, including earning, saving, investing, avoiding debt, and protecting your assets. This will help you build wealth for the future. It is a life-long process because your financial objectives change as you get older.

Along with doing what you can to boost retirement savings now, improving your financial literacy is one of the key steps you can take to ensure a better retirement.