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Are Americans really failing Finance 101?

Yes! Less than one-fifth of those polled passed a simple test asking whether stocks, bonds, savings accounts or certificates of deposit offered the best return over the last 20 years. Answer: stocks. Americans fail to comprehend the power of compound interest.

While 63 percent of Americans know the difference between a halfback and a quarterback, only 14 percent can tell the difference between a growth stock and an income stock. While 78 percent of Americans can name a character on a TV sitcom, only 12 percent know the difference between a load and no-load mutual fund.

man and child saving money

So what is being done about America’s ignorance on investing?

The White House is hosting the Summit on Retirement Savings in order to raise awareness. It’s mandated by the Savings are Vital to Everyone’s Retirement Act of 1997. Congress found that "a leading obstacle to expanding retirement savings is the simple fact that far too many Americans–particularly the young — are either unaware of, or don’t have the knowledge and resources necessary to take advantage of, the extensive benefits offered by our retirement savings system. Congress directed the Department of Labor to develop a program to promote saving for retirement and reach out to the public through public service announcements, public meetings, educational materials and an Internet site.

Do Americans know how much they’ll need to save?

Despite all the hype and media coverage of Wall Street these days, America faces a financial literacy crisis. Americans are turning to investments to meet their financial goals, yet studies and surveys show that Americans don’t understand the financial basics. They don’t understand how our securities markets work, how to assess the risks and rewards of investments or how to figure what they will need to save for retirement

Most Americans have high expectations for their retirement but according to a study recently released by the Employee Benefit Research Institute and the American Saving Education Council, 3 out of 4 American workers don’t know how much they will need to save to make their retirement dreams a reality. And two out of three households will probably fail to realize one or more of their major life goals because they’ve failed to develop a comprehensive financial plan.

How has saving and investing changed over the last two decades?

Today individuals must make financial decisions. In the past, planning for the future fell on external forces — government (through Social Security and Medicare) and employers (pension plans directed by the employer). Today, responsibility has shifted to the individual. Many Americans no longer expect Social Security to be their major source of retirement income and now find themselves in a precarious and challenging position.

There is a lot of talk over what to do with Social Security with the Baby Boomers up-and-coming retirement, what effect has it had?

The role of Social Security and Medicare is changing. Over two thirds of retirees today rely almost totally on Social Security, many because they did not know they needed to save. As the Commissioner of Social Security recently said on Capitol Hill, "Social Security was never intended to provide for all of a worker’s retirement income needs. Pensions and personal savings have always been and should always be part of a sound financial retirement plan. Average retirees today get 40 percent of their pre-retirement earnings from Social Security."

With life expectancy continuing to rise, many retirees can expect to live 20 years or more in retirement. That trend is likely to continue.

With the Social Security scare, are more people investing now?

The trend has shifted from saving to investing. In generations past, Americans put their money in savings accounts. They viewed the stock market as a pastime of the rich. Today, investing in the market is serious business, a necessity for accumulating the money essential for retirement or other financial goals. In 1989, 31.7 percent of U.S. families owned stock. In 1995, 41.1 percent owned stock. Assets of mutual funds, now more than $4.4 trillion, have surpassed the $2.7 trillion on deposit in US commercial banks.

Against this backdrop, the US savings rate has dropped. In 1997 the US savings rate (based on after-tax disposable income) fell to 3.8 percent, the lowest level in 58 years and less than half its postwar peak of 9.5 percent, set in 1974.

How has the change in investing affected the work place?

Pension plans have changed. In almost every sector, job benefits have declined and workers have increasingly realized that they will need to save for themselves to have economic security. Slightly less than half of America’s wage-earning and salaried workers are covered by pension plans.

Does a person’s personality affect their savings pattern?

Personality is destiny when it comes to saving and retirement security. "Planners" (about 21 percent of Americans) are in control of their financial affairs. "Strugglers" (about 25 percent of Americans) clearly have trouble keeping their heads above rough financial waters. "Deniers" (about 19 percent of Americans ) are almost deliberate in their refusal to deal with retirement. "Impulsives" (about 15% of Americans) are driven to seek immediate gratification—spending today and letting tomorrow take care of itself. A 1997 study by Public Agenda found that nearly half of all Americans report nothing or less than $10,000 in retirement savings.

How can and should people determine how much they’ll need for retirement?

It’s not hard to figure out what you’ll need to put away. The Ballpark Estimate is a single-sheet planning document that helps individuals calculate what they need to save each year for their retirement. Individuals can get the Ballpark Estimate by calling the SEC’s toll-free publications line at (800) SEC-0770 or from ASEC’s Web site.

A financial plan is the road map to reach your retirement goals. Yet two out of three savers in America according to two recent surveys, by the Consumer Federation of America and the Investor Protection Trust, have never prepared one.

Once someone finds out how much they need to save, what should they do next?

Individuals must set financial goals and come up with a plan to achieve them. Make a plan: Set goals, start saving, match investments to goals. Do an annual check up and choose help wisely.

And, as dangerous as ignorance is naiveté. Investors today have wildly unrealistic expectations about the market. A Wall Street Journal survey found in 1997 that mutual fund investors anticipated returns of 22.2 percent a year for the next decade.

Research the pros who will help you carry it out. Call your state securities regulators and ask: Is the investment registered? Are the broker and the firm licensed to do business in my state? Get that number by calling the North American Securities Administrators Association at (202) 737-0900. Or check with the Financial Industry Regulatory Authority (FINRA) public disclosure hotline at (800) 289-9999.

Get the facts in writing. Don’t get swept away by a smooth sales pitch. Always ask for and read the company’s prospectus or latest annual report. Know the investment. How long has the company been in business? What are its products and services? Has it made money?

What do investors need to know about fraud?

The tell-tale sign of a fraud is: pressure to invest. Sales people offering inside or confidential information. Claims of a once-in-a-lifetime opportunity. Promises of guaranteed returns. Assurance that it’s risk free. Reluctance or refusal to send you written information about the investment.

Complain promptly. If you have problems, get help right away. Contact the broker’s supervisor or the firm’s compliance officer. Write your state securities regulator, the FINRA and the SEC.

What should investors always remember?

A well-educated investor provides the best defense against securities fraud.

Individuals must set financial goals and come up with a plan to achieve them. Make a plan: Set goals, Start Saving, Match investments to goals. Do an annual check up and choose help wisely.

If you have questions please contact: Investor information, Division of Finance & Corporate Securities, (503) 378-4387.