TMFBro (< 20)

Are people capable of financial planning?

July 16, 2009 – Comments (6)

The Journal of Financial Planning has an article by Brent A. Neiser, CFP, about the difficulties "Middle America" (those with household incomes between $30,000 and $100,000) has with planning for, and planning in, retirement: 

"Almost half of At-Risk Middle Americans have 'extreme difficulty' understanding most financial information, and more than half think retirement planning is harder than raising kids. So where do they go for advice? Not to professional financial planners, not to the financial services industry, and not to the media—they rely on relatives, friends, and co-workers. The lack of professional direction shows up in a lot of unrealistic expectations: though only 12 percent of retirees have jobs, more than three-quarters of At-Risk Middle Americans approaching retirement are confident that they'll be making money after they retire. Financially, mentally, and culturally, At-Risk Middle Americans are terribly unprepared to fund their third stage of life."

Neiser is the director of strategic programs and alliances for the National Endowment for Financial Education, which has just unveiled a new website: http://www.decumulation.org.

However, as Neiser's article points out, just providing resources won't improve financial habits:

"But even if financial planning and perfectly structured products became suddenly available to every at-risk household, their behavioral patterns would largely stay the same. A senior financial services executive pointed out to think tank participants that his company had tried offering free online education and planning products. He said that consumers mostly ignored them, despite the company's highly regarded brand name and considerable promotion efforts."

Why don't people take responsibility for their financial planning? I have a few ideas:

1. Most people find this stuff boring.

2. After working all day, cooking and cleaning up after dinner, and getting the kids in bed, it's 9 o'clock and people are tired. They don't then want to read about IRAs.

3. They have to make choices that will likely involve sacrifice today for something that is decades away.

4. It could cause conflict. The article stated that "the large majority of At-Risk Middle American households say they seldom or never disagree with their own spouse about money, indicating that there's not a lot of talking about finances going on in the first place." My guess is, a lot of spouses are avoiding uncomfortable discussions about each other's spending habits, career choices, and priorities.

5. Basic financial literacy isn't taught in schools (a point raised by Fool tonyr53 on the Rule Your Retirement discussion boards, where I first heard about this article). 

6. People are overwhelmed by all the financial information and sometimes conflicting advice, and are in a state of analysis paralysis. 

I often ask myself, What would get people to change? I'd be open to your ideas. Maybe we need to produce a series of videos based on the old "Scared Straight" shows, but instead have destitute older Americans screaming about all the mistakes they made.