By Diane M. Wilson CFP® Individuals today make more financial decisions than previous generations. Previous generations saved for purchases before buying, worked until they could no longer work, and lived in extended families during retirement. Few, if any, had credit cards, 401(k) plans, car payments, or even mortgages, so financial knowledge was less important.
Our modern world requires financial knowledge in order to make sound financial decisions. For instance, Mitchell and Lusardi (2015) showed that many people make poor economic decisions because they lack financial knowledge. Lack of financial knowledge can be expensive or even ruinous for many. In addition, the well-educated are not immune to poor economic decisions. According to Mitchell and Lusardi (2015) only 44.3% of college educated and 63.8% of postgraduates answered the “Big Three” financial illiteracy questions correctly. The benefits of financial knowledge, together with a financial planner’s expertise, offers benefits throughout one’s life expectancy,
Individuals with greater financial knowledge have a better understanding of income streams. Social Security may be the most important income stream a retiree will make a decision about. An income stream that lasts not only as long as the claimant lives, but through a lower earning spouses lifetime. Longevity risk is the risk of living longer than anticipated and may be one of the most important risks to a retiree’s financial success. Longevity risk is the main reason retirees should plan well for their Social Security income stream.
Research by Kim, Maurer, and Mitchell (2016) found that early exposure to financial planners generated substantial additional lifetime wealth. In addition, the time saved by delegating financial decisions to a financial planner cannot be overlooked. Using a financial planner to help with the Social Security claiming decision will save time from the research required to make an informed decision or save clients from making an uninformed decision.
Financial knowledge and access to financial planning professionals enable retirees to make an informed decision about when to claim Social Security benefits so they are better protected. A larger lifetime income stream will help navigate the requirements of our modern world concerning complex decisions about financial matters, and the products of the future.
Lusardi, Annamaria, and Mitchell, Olivia S. (2015) “Financial Literacy and Economic Outcomes: Evidence and Policy Implications” Pension Research Council. January 2015
Kim, Hugh Hoikwage, Maurer, Raimond, and Mitchell, Olivia. ((2016). “When and How to Delegate? A life Cycle Analysis of Financial Advice” Pension Research Council. March 2016.