Friday, December 02, 2011

What Happens to the Financially Illiterate?

Now that Americans are in charge of their own retirement security, they need the ability to add, subtract, and multiply and an understanding of financial concepts such as inflation, compound interest, and risk diversification. The trouble is, many Americans have only limited skills in these areas according to an analysis of survey data by the Employee Benefit Research Institute. Does do-it-yourself retirement make sense, then, or is it throwing people to the wolves?

EBRI analyzed data from the National Financial Capability Study, which asked a representative sample of Americans in each state a series of questions to determine their financial literacy. The results are disturbing. New Hampshire was the top scorer, with 69 percent of adults in the state understanding basic financial concepts. The bottom scorer was Louisiana, where 58 percent were financially literate.

The 11 percentage point gap in financial literacy between New Hampshire and Louisiana is not the problem. The problem is the 31 to 42 percent of Americans in each state who lack the knowledge and skills to properly manage retirement savings. Do-it-yourself retirement might work for some. But what does it mean for the financially illiterate?

Source: Employee Benefit Research Institute, How Do Financial Literacy and Financial Behavior Vary by State? Notes, November 2011

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