Financial Literacy: How Do You Stack Up?

By Paul Manger

November 6, 2020

Financial Literacy: How Do You Stack Up?

recent study by the TIAA Institute sheds light on the millennial generation’s financial literacy and how it stacks up against other generations. The findings are shocking and bring attention to the sheer lack of proper financial planning education in many generations, not only the millennials.

Six Questions to Gauge Your Financial Literacy

The study uses six questions to determine your financial literacy, three of which they called the “Big Three.” Answering those three correctly would qualify you as financially literate in this study.

The “Big Three” test the knowledge of three basic personal finance concepts:

  1. Interest Rates
  2. Inflation
  3. Risk Diversification

The remaining three questions test your advanced financial literacy addressing:

  1. Mortgages
  2. Bond Pricing
  3. Compound Interest

First of all, I’m a millennial and a college graduate with a business degree. Had I not worked at Barber Financial Group for the past seven years, I probably wouldn’t be able to answer most, if not all, of these questions.

Before we present the questions, let’s review the respondent data from the study. Even though the intent of the “Big Three” questions is to be quite fundamental, only 34% of adults ages 38 to 64 answered all three correctly. Millennials (ages 18 to 38) did far worse, with only 16% answering all three correctly.

Additionally, and maybe even more telling, over 71% of older adults gave themselves a “high financial knowledge” rating, and 62% of millennials report they also rated themselves as “high financial knowledge.” The disconnect is sobering.

Now on to the questions so you can see how you stack up.

Financial Literacy: How Do You Stack Up?
on America’s Wealth Management Show

Click Here to Read the Transcript 

Financial Literacy: How Do You Stack Up?

Links Mentioned on this Episode

Podcast: How to Avoid the Biggest Tax Traps with Ed Slott

Retirement Plan Checklist Complimentary Consultation

Dean Barber: Thanks so much for joining us here on America’s Wealth Management Show. I’m your host, Dean Barber, along with Bud Kasper. Bud.

Bud Kasper: Sir.

Dean Barber: All right. So, I thought it’d be interesting today if we planned a show on financial literacy. We recently wrote an article on financial literacy, and it was a study done by the TIAA Institute. This financial literacy quiz was six questions, which you and I look at these questions, and we go, “Okay, I know the answers to those.” Interestingly, only 34% of adults, ages 38 to 64, got all of the answers to three of these basic financial literacy questions correctly. But, 71% of those people considered themselves to have high financial knowledge. Okay?

Bud Kasper: Yep.

Dean Barber: Now that’s scary.

Bud Kasper: It is. I mean, who are they fooling? Right. Themselves in that case. You’ve got to become aware of what this is all about for you.

Tribute to Trebek

Dean Barber: You absolutely do. And then as we planned the show out, we had the untimely passing of our favorite Jeopardy host, Alex Trebek.

Bud Kasper: Yes. Very sad. Very sad.

Dean Barber: Very, very sad, indeed. And so, we thought we’d pay a little tribute to Alex Trebek today and do a little financial Jeopardy, talking about financial literacy. Now I’m not Alex Trebek. You’re not Alex Trebek. I wouldn’t pretend to know precisely how he does what he does or did what he did. But you and I will ask some questions of each other today and try to make this entertaining for our listeners. So, we’re going to ask questions and see if we can stump each other here. Right?

Bud Kasper: Okay. 

Dean Barber: Let’s see if we can maybe get the right answer or the wrong answer. But here’s the thing. Here’s what I think is critical. Right? You could go on the game of Jeopardy… We’ve all watched it at some point. Some of you were avid watchers of it. Some of you caught it in passing or observed a few episodes or whatever. 

But the point is that if you went on to Jeopardy and won, you got to take home some money. If you lost, you still got to brag to your friends and your family that, “Hey, I was on Jeopardy.” And that’s a big deal.

Bud Kasper: Yeah. And that’s no different than what we’re going to talk about. Right?

Dean Barber: Right. But if you don’t win, there is nothing there other than the fact that you didn’t win.

Bud Kasper: Yeah.

What You Think You Know Can Get You in Trouble

Dean Barber: When it comes to financial literacy, however, it’s not what you think you know, that’s right. I mean, it’s what you think you know that just ain’t so, that can get you in trouble. That’s that old Mark Twain saying? Right?

Bud Kasper: Right. I don’t remember it!

Dean Barber: This is going to be a fun day.

Bud Kasper: Yeah, it is.

Dean Barber: The point is if you get something wrong, or if you don’t know the answers to some basic financial things when it comes to planning for your retirement or even getting started, the consequences of not knowing are far greater than the reward of knowing.

Bud Kasper: Yeah. 

Dean Barber: Right?

Bud Kasper: And the worst part about that is, you don’t know what you don’t know. Right?

Dean Barber: We’ve said that a lot of times. 

Bud Kasper: You’ve said that a lot, yeah. But that’s a true statement. Because all of a sudden, you think you know it all. You’re going about your business; then somebody makes you aware of something you could have done that’s so financially rewarding you say, “I didn’t know it.”

Dean Barber: Right. Or, you thought you knew the answer, but you were just misinformed. Right? So, let’s start with a couple of these here before we get too far into the show. 

Questions on Financial Literacy

So, six questions to gauge your basic financial literacy. The first one, Bud, I’m going to ask you, is an interest rate question. We can go back and forth with these and see who does the best.  

Savings Interest Rates

Suppose you had $100 in a savings account, and the interest rate was 2% per year. After five years, how much do you think you’d have in the account if you let the money grow? Would you have more than $102? Exactly $102? Or less than $102?

Bud Kasper: I would have more than $102.

Dean Barber: Ding, ding, ding, you win. All right, do you have one for me?

Bud Kasper: Yeah. Let me find it here. Oh, Dean, you didn’t tell me to get these ready for you.

Dean Barber: Yeah, you’re there. There you go.

Mutual Funds versus Stocks

Bud Kasper: Okay. Let’s see. Buying a single company stock usually provides a safer return than a stock mutual fund. True or false?

Dean Barber: False.

Bud Kasper: False is correct. And the reason it’s right is that when you spread your risk over multiple stocks, rather than one, you’re likely not to have the severity of the downturn.

Dean Barber: Right. It’s called diversification.

Bud Kasper: Exactly.

Bond Pricing

Dean Barber: One of the first things we preach is not putting all your eggs in one basket. Diversification. All right, bonds. Let’s move on to bonds here. Bond pricing. If an interest rate goes up, what will typically happen to the bond value? They’ll stay the same. They’ll fall. Or they will rise.

Bud Kasper: They will fall. It’s easy. Just remember two arrows going in different directions. Interest rates go up; the value of your bond is going to go down.

Dean Barber: Right. I always gave it like a teeter-totter example.

Bud Kasper: Teeter-totter, seesaw. Yeah.

Dean Barber: Yeah. Teeter-totter example. If one goes up, the other goes down. Right?

Bud Kasper: Right.

Dean Barber: If interest rates are falling, bond prices are typically rising.

Bud Kasper: Now, these don’t seem too difficult. Do they?

Dean Barber: But Bud, remember, 66% didn’t answer three of these correctly. Only 34% got them right. And this is adults age 35 to 64.

Bud Kasper: Okay. 

Dean Barber: All right, go ahead. I got another one for you. You give me one.

Annual Compound Interest

Bud Kasper: Okay. Here you go. Suppose you owe $1,000 on a loan, and the interest rate that is 20% per year, compounded annually. If you didn’t pay anything off at this interest rate, how many years would it take for the amount to double?

Dean Barber: Well, if Guido doesn’t come to break my leg to try to get the money back, I would say just a little bit over two years, based on the- Well, it’d be a little over three years. I’m sorry—a little over three years. So somewhere between two and five years based on the rule of 72.

Bud Kasper: And that is a correct answer. And I tell you, when I took this quiz as well, I had to go in on paper, to do the compounding, to make sure I was right with my answer. And it was right at three years. You’re right.

You Need Someone Who Knows the Answers

Dean Barber: All right. Here’s the thing. This is just scratching the surface of some fundamental things. We will get into some far more complex questions revolving around Social Security, IRAs, and general financial planning. But you don’t have to know the answers to all these questions. 

What you need to know is somebody who does know the answers to all these questions. That’s why we’ve been here, right here, for almost 20 years on America’s Wealth Management Show, educating you. It’s not because we don’t know what we’re talking about. It’s because we’ve been doing this for over 70 years combined between Bud and myself.

I want to invite you to get a complimentary consultation by clicking here. Let’s sit down and not just test your financial literacy. How about we test where you are on your road to financial success? We can do it via a web meeting, in person, or by telephone.

Remembering Trebek

We’re talking about financial literacy, tying it to Alex Trebeck, so we’re going to do a little more financial Jeopardy here, Bud.

Bud Kasper: Yeah, I can feel it already. He was such a gentleman, and I think I should even phrase it this way, he was a gentle man. He was so dedicated to his fans and his program. Believe it or not, Dean, because he just died 12 days ago, but he recorded 35 shows to get the program through the end of the year before he passed.

Dean Barber: That’s crazy.

Bud Kasper: And he stopped working only ten days before he passed away.

Dean Barber: That’s dedication.

Bud Kasper: It is dedication. That show and his fans meant a lot to him, and he expressed that as well.

Dean Barber: Yes, God rest his soul.

Bud Kasper: That’s right.

Dean Barber: All right. So here we go—Financial Jeopardy or testing your financial literacy. At the beginning of the program, we mentioned that we were talking about a recent study by the TIAA Institute. There were six questions in this financial literacy test. 

Sense of False Confidence in Financial Prowess

The three basic financial literacy questions were answered correctly by 34% of adults aged 38 to 64, and for the millennials age 18 to 38, they did far worse. Only 16% answered all three correctly. The crazy thing, Bud, is that 71% of the adults gave themselves a high financial knowledge rating, and 62% of millennials did the same thing. They gave themselves a high financial knowledge rating.

Now, here’s the scary part. When you get into advanced financial literacy, three questions were basic, three advanced questions, only 7% of the adults answered all six correctly, and only 3% of millennials. So that old Mark Twain saying, “It ain’t what you know that gets you in trouble, it’s what you think you know that just ain’t so.” 

There it is, a tongue twister. “It’s what you think you know, that just ain’t.” Think about this; these people thought they knew the answers. And again, if you don’t know the answers and you get it wrong, the consequences in your financial life and your long-term security are devastating.

Bud Kasper: This is what streams through my mind, and that is that the compounding of the mistake is so costly in a person’s lifetime. Your standard of living could have been substantially better if you had a higher level of literacy. And that’s why we’ve dedicated to this program for so many years now, the longest-running financial planning program in the area, and what we want to do is continue to enlighten you. So if this strikes you as a little bit startling, it should.

Retirement Plan Checklist

Dean Barber: I’ve got an easy way for you to get some of the questions that you should be able to answer without going on to Jeopardy and exposing yourself in front of a nationwide audience. It is by getting a copy of our Retirement Plan Checklist. It’s one of the most requested items on America’s Wealth Management Show history and the most downloaded items from our website. It has age-based timelines and a full checklist of things that you need to be thinking about when it comes to your successful retirement.

Mortgage Interest

So Bud, one more question on this financial literacy test, and I’m going to ask it of you. A 15-year mortgage typically requires a higher monthly payment than a 30-year mortgage, but the total interest paid over the life of the loan will be less. True or false?

Bud Kasper: True. Now, how many people have mortgages that are listening to us right now? And just a simple understanding of this could cost you thousands of dollars.

Dean Barber: Oh my gosh, yeah. It’s crazy.

Social Security Quiz

We’re going to get into something fun here. Back in 2008, I wrote a book called Social Security Essentials. It was in Investment News, one of our industry publications, as one of the best books written to educate financial advisors on how to help their clients plan for Social Security.

Bud Kasper: Kudos for you, Dean. It was a great book.

Dean Barber: So here’s the thing. When we talk about Social Security, you need to know a number of different things. So I’m going to ask you a question. I’m going to give you a multiple-choice here on Social Security. And as you’re listening, you need to think about this. All right. Social Security is taxed; how? At your ordinary-income rate, at the same rate as your qualified dividends, or it’s not taxed at all?

Bud Kasper: It’s taxed in its position because it’s called a modified adjusted income that you have to look at with Social Security.

Dean Barber: That wasn’t one of the answers.

Bud Kasper: Social Security is taxed by itself. That’s what I’m saying.

Dean Barber: But if all you have is Social Security, how’s it taxed? It’s not taxed at all. Right? If all you have is Social Security income, there is no tax on Social Security.

Bud Kasper: Oh, you add no more ingredients into it.

How is Social Security Taxed?

Dean Barber: No. So that’s it. Right? If it’s just a fundamental Social Security question: how is Social Security taxed? At ordinary income rates, at dividend rates, or it’s not taxed at all? It’s not taxed at all. Social Security, by itself, is a tax-free source of income. Now, Bud, what causes Social Security to be taxable for some, but not all people?

Bud Kasper: It’s going to be the sourcing of your money. So if you have money coming out, that’s taxable. That’s going to increase the probability that you’re going to a higher Social Security tax.

Dean Barber: And that is called what?

Bud Kasper: The provisional income.

Dean Barber: There you go. So there’s a term for you, provisional income rules. So the provisional income rule says that if you are married and your provisional income, which is made up of 50% of your combined Social Security payments, plus any other sources of taxable income and any income coming from municipal bonds exceeds $32,000, then up to 50% of your Social Security will be taxed.

First Tax on Social Security

If that amount exceeds $44,000, up to 85% of your Social Security will become taxed. Now, Bud, question, which president was the first president to tax that 50% of your Social Security?

Bud Kasper: I might have to make a guess. Roosevelt?

Dean Barber: Ronald Reagan.

Bud Kasper: You’ve just jogged my memory.

Dean Barber: Ronald Reagan, under the Tax Reform Act of 1986.

Bud Kasper: Okay. Well, that’s a good question.

Dean Barber: All right. Which president took the Social Security tax up to 85% of your Social Security?

Bud Kasper: Not Ronald Reagan. 

Dean Barber: Nope. It was Bill Clinton.

Bud Kasper: Boy, at least you are bi-partisan on the answer there, Dean. 

Dean Barber: Well, Bill said, “50% is not enough. We need to tax 85% of this stuff.”

Bud Kasper: We need the money, honey.

Dean Barber: Well, we can make a good pitch there, Bud. At least 15% of your Social Security is going to be tax-free.

Bud Kasper: Yeah. Isn’t that a deal? Money that you’ve contributed to. That’s great.

Social Security Rate Increases

Dean Barber: So here’s another Social Security question for you, Bud. Between what Social Security defines as full retirement age and your maximum Social Security eligibility amount, at what rate will your Social Security benefits increase? Is it 4%, is it 6%, or is it 8%?

Bud Kasper: It’s 8% after your full retirement age at 6%, up to your full retirement age.

Dean Barber:  Bingo, you got one right.

Bud Kasper: Good for me.

Dean Barber: One out of three. We’re testing you on it. The others were political, though, so that doesn’t count.

Spousal Social Security Benefits

Let’s turn that around, your spousal Social Security benefits, which means if you have a spouse whose Social Security benefits would be less than half of yours, then they can claim half of yours if it’s higher than theirs.

So the spousal benefits from full retirement age, based on how that’s defined by Social Security, up to the maximum Social Security amount, the spousal benefits will increase by what rate, 8%, 6%, or they won’t increase at all?

Bud Kasper: They won’t increase it all.

Dean Barber: So that’s another one, Bud. Social Security benefits for the spouse, once you reach full retirement age as defined by Social Security, stop increasing. If you’re going to claim spousal benefits, you should never claim those spousal benefits beyond full retirement age.

Bud Kasper: So listen to what we’re talking about here. These are questions that don’t seem to be complicated, but they are. And if you don’t know, it’s going to damage your success.

Dean Barber: Yeah. If you don’t know the answers to these questions, the cost of not knowing the answers to very basic financial planning questions when it leads into your retirement can cost you dearly, and Bud, we’ve seen it. We’ve seen so many times. We’ve seen how the average couple at 62 years old will have over 600 different ways to claim their Social Security. The difference between the best-claiming strategy and the worst claiming strategy often exceeds $100,000 of additional lifetime benefits. I don’t know about you, but man, I want to get that answer right.

Bud Kasper: That’s right. And especially when you understand from a taxing position that what you’re doing could enhance you even more with proper planning.

You Don’t Have to Know All the Answers

Dean Barber: And as I said before, you don’t have to know the answers to all these questions. You have to know somebody that does know the answers to all these questions. We dedicated our entire career to focusing on you nearing retirement or in retirement and answering all of your questions. We want to make sure that you are financially independent and that you stay that way. You get to live your best financial life. 

Click here to get a complimentary consultation. Let’s sit down and talk about you. We’ll talk about what you want to do and take some time to listen to the things that are on your mind, the concerns you have. Use our knowledge and expertise, and decades of experience to help you live your one best financial life. A complimentary consultation can be had either by a video meeting, in-person meeting, or by telephone. 

Thank You to Our Veterans

Dean Barber: I want to take a minute, Bud, to thank all of our veterans who so bravely served our country over the history of the United States and just a special thank you and a God bless you to all of our veterans out there as we celebrated Veteran’s Day, Wednesday of this last week. Without the veterans, Bud, we wouldn’t be where we are today as a country.

Bud Kasper: Yeah, I lost my uncle two years ago. He did two tours in Vietnam. He died of pancreatic cancer, same as Alex Trebek, and he thought, in the back of his mind, that Agent Orange had some contribution to the cancer he got. I can’t stress enough the thanks that my family has, and I know yours and others around the country, in terms of the people who have given their lives and sacrificed so much for the freedoms we had.

I sent out a small note right before the election to all our clients to say, “Hey, this is a gift. A gift because we had people that made sacrifices for us to be able to live our lives and be able to have choices.” And that’s most certainly what we just experienced.

Dean Barber: Yes, sir. We’re doing this financial literacy program today, and we’re going to do all kinds of things about financial literacy. We’re doing it in a Jeopardy-style type of a program in tribute to Alex Trebek. But, Bud, before we get back to financial Jeopardy, I’ve got another one for you.

Bud Kasper: All right. So, which president famously said, “A nation is judged by how well it treats its veterans?” Which president said that?

Bud Kasper: Harry Truman?

Dean Barber. No, no. George Washington.

Bud Kasper: Oh, interesting. That far back?

401(k) Contributions

All right, here’s your question. Contributions into 401(k)s are what amount, and what about 403(b)s?

Dean Barber: 401(k)s is up to $24,000. 403(b)s, I think it’s the same number.

Bud Kasper: It’s $19,500, plus the $6,500 catch-up for $26,000.

Dean Barber: There you go.

Bud Kasper: We’re having a little fun, today folks. But I think the point, obviously, of the show is, there are things that you don’t know, and you need to turn to people that deal with this every day to make sure you’re not making a mistake because of the mistakes that you make in retirement planning are costly. And I mean in dollars and cents.

Dean Barber: All right, Bud, I’ve got another for you here because you’re right, they are costly. Here’s the thing, we’ve said many times here on America’s Wealth Management Show that an investment mistake can be made up if you have enough time.

Bud Kasper: True.

Dean Barber: Okay?

Bud Kasper: I agree.

Dean Barber: A tax mistake, there’s no do-over.

Bud Kasper: There is no do-over because it’s for that specific timeframe.

Dean Barber: That’s right. Uncle Sam doesn’t give you a do-over.

Traditional versus Roth

So Bud, which type of retirement account gives you the most favorable tax benefit? Is it the 401(k) or the traditional IRA? Or is it the Roth IRA? Or the Roth 401(k)?

Bud Kasper: Well, you gave me a softball there. Roth by far. Now, you and I have talked about this on so many occasions. You don’t get the deduction on the Roth IRA account from that perspective. However, that after-tax money, that’s the seed or the harvest, right? 

It is the fact that people I think have got it wrong, we’ve been doing this pre-tax, pre-tax, pre-tax, and we’re going to exceed this situation now when we look and see what Biden’s going to bring up, assuming he’s going to have the presidency.

Why Do People Mess it Up?

Dean Barber: All right. Here’s the thing though, Bud, that fundamental question, which has the most tax benefits? Whether it’s the traditional IRA or the Roth IRA. Let me tell you why I think that is messed up so often.

Bud Kasper: Okay.

Dean Barber: Okay? You take your tax return, or you’re doing your tax return on TurboTax. You’re running through it, you’re sitting down with your CPA, or you’re looking at the screen on TurboTax. The screen says, “If you made an IRA contribution of $6,000,” which is the maximum amount, “You would reduce your tax bill today by $1,500 or by $2,000, whatever tax rate you’re in.” Right? 

So, what happens is that the typical CPA, they put on their CPA hat, they’re preparing your tax returns, and what they’re trying to do is be the knight in shining armor, the guy riding on the white horse and saying, “I’m here to save the day, look at what I just did. I let you put $6,000 into an IRA, and it reduced your tax bill by $2,000, aren’t I a hero?” So the tax benefits in the initial year are more significant for the traditional IRA, or traditional 401(k). However, the long-term tax benefits are far better in the Roth IRA.

Bud Kasper: Absolutely. No doubt about that. It goes back to what you mentioned before; you either pay tax on the seed or the harvest. You pay that tax in the year you had to, but that’s the last time you’re going to pay that tax.

Once Again… Traditional Versus Roth?

Dean Barber: All right. So here’s a little question for you. Suppose that you have a married couple filing jointly, earning income five years from retirement that puts them in the 32% tax bracket. In retirement, five years from now, they will have a hundred percent of their debt paid off and can live on only $100,000 per year, putting them in the 22% tax bracket. Which type of retirement account should they invest in today? Would it be the traditional IRA, or would it be the Roth IRA?

Bud Kasper: I’m going to say the traditional.

Dean Barber: Exactly. And the reason is that they can deduct, that due to the deduction of the 32% and later on if they’re only taking enough out, that they’re going to be in the 22% bracket, they got an automatic savings of 10%.

Bud Kasper: For sure.

Dean Barber: Okay? But then so many people would say, “Oh man, if you got the Roth available, you should always contribute to Roth.” Not so fast, right? There are nuances when it comes to all of these different things. And you know what? We highlight a lot of these. There’s no way we’d get them all, but we highlight many of these in our Retirement Plan Checklist

It has both age-based questions and a checklist of things you need to do, and a basic checklist of 30 things that you need to be thinking about as you head into retirement or even if you’re already retired. So click here to get a copy of that Retirement Plan Checklist.

Social Security FICA Tax

Bud Kasper: All right, Dean, here’s one for you. Social Security, okay? When we go in, and we look at FICA tax, how much is the FICA tax today?

Dean Barber: The FICA tax is 13.2%, and you pay half of that, and your employer pays the other half.

Bud Kasper: Yeah, it’s 6.2%.

Dean Barber: So it’s 12.4%.

Bud Kasper: Right, when you’re putting it together.

Dean Barber: That’s why we always say Social Security is your money. Think about it. If you were putting in 6.2% into a 401(k) and your company was matching that 6.2%, wouldn’t you pay attention to what was going on there?

Bud Kasper: Absolutely, you would.

Dean Barber: You’d kind of look at that, and that money is building, and it’s a nest egg, what do you start thinking about then? You start thinking about how I will get that money out of there, and how am I going to get the most out of that system? 

That’s what Social Security maximization is all about. We mentioned this in the last segment that the average couple aged 62 will have over 600 different ways to claim Social Security. The difference between the best and the worst is over a hundred thousand dollars of lifetime income. Based on the same life expectancy and the same earnings history. It’s huge.

Bud Kasper: How significant is that?

Dean Barber: A lot of money.

Bud Kasper: It is.

Dean Barber: All right.

Bud Kasper: But it only comes from planning.

We’re Strive to Make Our Listeners Financially Literate

Dean Barber: We know these things. We’ve been educating you here on America’s Wealth Management Show for almost two decades. We have many more decades than that and combined experience between the microphone here, Bud, and I. We encourage you to click here and request a complimentary consultation. Let’s talk about your situation. We will take the time to listen to you, what your concerns are, and what you’re trying to accomplish. So that we can help guide you in the right way using our Guided Retirement System™. 

What About Inflation?

Dean Barber: So, we’re testing your financial literacy here. Bud, when planning for your retirement, when it comes to inflation, what number should you use? Should you use the most recent 10-year inflation number? Should you use the long-term average of inflation, or is inflation not a consideration in retirement?

Bud Kasper: It is absolutely a consideration, and you should use the long-term average for that, but you have to also take that into consideration with what the current inflation rate is to see if it’s even close to what the average would be over a given timeframe.

Healthcare and Inflation

Dean Barber: All right. To follow up on that question, when calculating inflation into your retirement plan, should you use the average inflation rate over the longterm on all of your spending needs, or should you get more specific and inflate healthcare at a higher rate than food and energy, housing expenses, taxes, et cetera. How should you treat that? Just inflate everything at the same rate or should you be more specific and inflate each budget item at its historical average?

Bud Kasper: More specific. Okay. So we might use this as an example, 3.9% on the inflation rate on investments, but we would probably use more like 6.8% for medicare.

Dean Barber: Yeah, so all your health care expenses are going to inflate, and we see it happen.

Bud Kasper: Year after year, after year.

Dean Barber: Right, so what happens is that if you don’t go in and specifically itemize those expenses by creating a budget before retirement, what winds up happening, and you apply a basic inflation rate to everything, you have certain things that are going to inflate faster, I.E., healthcare. 

All of a sudden, what happens is you’re ten years into retirement, and now your healthcare expenses make up a far larger percentage of your overall costs, because why? Because you didn’t take into consideration the right inflation rate for each specific item.

Bud Kasper: That’s been the shocker, hasn’t it? For people preparing to retire before the time that they can start taking their Social Security. So it’s a significant problem that people need to deal with. If there’s one thing that we see that postpones or perhaps really postpones seriously, is the amount of inflation going on right now because it needs to be factored in.

Another 401(k) Question

Dean Barber: All right. So another basic financial planning question, unless you have one for me, Bud?

Bud Kasper: Okay, when you have a 401(k), at what age can you start taking money out if you need to under what kind of penalty?

Dean Barber: Well, there are several different rules about your 401(k). So you could do at any age, you could start taking money out of your 401(k) if you’ve separated service under IRS code section 72(t). There are some particular limitations around that. 

However, if you’re talking specifically about taking money out of your plan without the 10% penalty, the age is 55. And that is if you’ve separated service, you leave money in the 401k plan. You’re allowed to take money out of the 401k plan without the 10% penalty. However, if you roll that money over to an IRA, you no longer have that 10% exception, and then your age is 59 and a half.

Bud Kasper: That is correct all the way through.

Dean Barber: Thanks to my years of training. Side-by-side with you, with our good friend Ed Slott, who’s considered America’s IRA expert. And there are 76,000 plus pages in the tax code, and a vast majority of those surround the rules as it comes to your retirement plan. 

Understanding the Rules Around Taxes

You and I spend hours, upon hours, upon hours of study every single year on those rules. By the way, we do have a great interview on The Guided Retirement Show, our podcast with Ed Slott. That episode is episode 31 on The Guided Retirement Show. You can find out on your favorite podcast app or YouTube. So that’s a great interview that I do with Ed, by the way. In that one, when we talk all about the Secure Act.

Bud Kasper: Is that right? Yeah. I think the significance of the time we spend with Ed is that just when you feel you have a pretty good command of it, you see how things can change. More significantly, that is what we’ve been experiencing with these private letter rulings. People that challenged the IRS as to whether or not they could do what they want to do. Some of them are crazy, aren’t they?

Dean Barber: It used to be that you could get a private letter ruling and relatively cost-effective, but now what is it? $10,000 for a private letter ruling?

Bud Kasper: I think it’s a little higher than that, but yeah, it’s right around the $10,000 level.

Dean Barber: Greedy politicians, there you go. We’re done with politics, nevermind. 

Here is an Insurance Question for You

All right, so here’s a question for you, Bud. This question has to do with insurance. Now, some people think that after you’re retired, the need for insurance diminishes. However, you and I both know that there is a high risk of either one or the other, or maybe both spouses entering into a long-term care stay type of situation that could devastate the surviving spouse. What kind of insurance will allow you and your beneficiaries to always get more out of the insurance policy than you ever paid into it?

Bud Kasper: And the answer is a hybrid policy. And I’m a living example of that. 

Dean Barber: Yeah, explain the hybrid policy?

What is a Hybrid Poilcy?

Bud Kasper: A hybrid policy is something that you have a little more flexibility and control over because if you have that long-term care and don’t use it, you lose it. From that perspective, that’s not good necessarily for my estimation, for my person, if you will, to have that type of policy. So what I ended up doing was taking a policy that had a death benefit of a million dollars. 

Okay? Now, if I go into a nursing home qualified, of course, then I can get up to 65% of that. I’m sorry, 60% of the death benefit while I’m alive and in the nursing home, to defer those expenses. Let’s say I went in there, and I used $600,000, 60% of my base, and the policy. And let’s say I die at that time, then my wife still has $400,000 that comes back to her income tax rate.

Dean Barber: And If you never used any of it on long-term care, your wife gets the million dollars?

Bud Kasper: That’s exactly right.

Dean Barber: Okay. So there’s the way that I think is the best way to think about long-term care because yes, it’s a risk, so let’s transfer that risk to the insurance company, but let’s make sure as we’re transferring the risk to the insurance company, that either, us while we’re living or your beneficiaries, when you pass, will get more out of that policy than you ever put into it. The hybrid policy, in my estimation, is the best way to do that.

Bud Kasper: Without a doubt, I think that’s right.

You Just Need to Know Someone Who has the Answers

Dean Barber: All right, so there’s all kinds of questions, all sorts of things that face you as you enter into that retirement phase of your life. So if you’re out five, ten years from retirement, you need to start thinking about these things. You can get the answers to the questions, and you can get all of the items that you should be thinking about, all in our Retirement Plan Checklist. You can find it here

Dean Barber: That Retirement Plan Checklist is about 13 pages of great information. So well worth the time to get out there and download it. While you’re at it, request a complimentary consultation by clicking here. Let’s sit down either through a video meeting or a telephone call or come in, in person and sit down and talk to us. We’ll listen to you and understand and hear from you what it is that’s on your mind. 

Look, like we said earlier, quote from Mark Twain, it’s what you think you know, that just ain’t so, that’ll get you in trouble. 

Remember the financial literacy, 71% of adults thought they knew the answers to these questions, and they considered themselves to be high ranking when it came to financial knowledge. Only 7% answered all the questions correctly. Don’t let that be you. Thanks for joining us on America’s Wealth Management Show. I’m Dean Barber, along with Bud Kasper, we’ll be back with you next week, same time, same place.

The “Big Three” Basic Financial Literacy Questions

See if you can answer the three following questions correctly.

Interest Rate Question: Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

A. More than $102
B. Exactly $102
C. Less than $102
D. Don’t know
E. Prefer not to say

Inflation Question: Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?

A. More than today
B. Exactly the same
C. Less than today
D. Don’t know
E. Prefer not to say

Risk Diversification Question: Buying a single company’s stock usually provides a safer return than a stock mutual fund.

A. True
B. False
C. Don’t know
D. Prefer not to say

If you regularly listen to our radio show or podcast or read our articles, you know Dean Barber likes to say, “My goal is to educate my clients so they are more knowledgeable than your average financial advisor.”

Well, if you’re ingrained in our content, I don’t doubt you answered those questions correctly, but what about the advanced financial literacy questions? Only 7% of older adults and 3% of millennials answered all six questions correctly!

Advance Financial Literacy Questions

Bond Pricing Question: If interest rates rise, what will typically happen to bond prices?

A. They will rise
B. They will fall
C. They will stay the same
D. There is no relationship between bond prices and the interest rate
E. Don’t know
F. Prefer not to say

Compound Interest Rate Question: Suppose you owe $1,000 on a loan and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double?

A. Less than 2 years
B. At least 2 years but less than 5 years
C. At least 5 years but less than 10 years
D. At least 10 years
E. Don’t know
F. Prefer not to say

Mortgage Question: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less.

A. True
B. False
C. Don’t know
D. Prefer not to say

Where Do You Stand?

Answers to the “Big Three” Financial Literacy Questions

  • Interest Rate Question: More than $102
  • Inflation Question: Less than today
  • Risk Diversification Question: False

Answers to the Advanced Financial Literacy Questions

  • Bond Pricing Question: They will fall
  • Compound Interest Question: At least 2 years but less than 5 years
  • Mortgage Question: True

So, how did you do? Are you part of the financially literate as qualified by this study? Did you answer all six questions correctly to be advanced?

Financial Literacy is About Education

At the end of the day, it’s about education. The study recommends financial wellness education from employers, but we think it is good advice for any individual looking to better themselves financially. It also happens to align with our process. They suggest starting with the following items:

  • Start with a financial check-up
  • Use a holistic approach
  • Personalize wellness plans
  • Make it simple
  • Make it timely
  • Repeat on a regular basis

Education About Financial Planning is Vital

Our Guided Retirement System™ financial planning process follows the items listed above very closely. We provide a complimentary consultation to give you a financial check-up. The Guided Retirement System™ is a comprehensive, or holistic, financial planning approach. We personalize all of our financial plans to the goals of the client.

Financial plans have a personal retirement index (PRI) that shows clients the probability of successfully achieving their goals while considering their current financial situation. It makes decisions simple when a new timely event occurs or clients may be planning for a change, we can input that change into their plan and see how their PRI is effected. Ultimately, it shows them how changes will impact their probability of success, as defined by them.

We regularly meet with our clients so we know what changes are coming their way or how we might need to adjust their plans to stay on course.

Barber Financial Group is All About Education

For 15 years Dean Barber and Bud Kasper have been educating people on America’s Wealth Management Show. The original idea was to educate the masses on financial planning techniques often thought to be reserved for the ultra-wealthy.

Since beginning America’s Wealth Management Show, Barber Financial Group has focused on bringing this type of education to those near retirement or already retired. We built an Insights section on our website full of articles, videos, podcasts, and more educational resources all created to help you achieve your goals in retirement.

The podcast, The Guided Retirement Show is a show where Dean speaks with subject matter experts on retirement and financial planning topics ranging from taxes to traveling in retirement. It’s a podcast about all things retirement.

Plan Your Future

The good news is, if you’re reading this article, you’re getting a head start. Financial literacy is incredibly important to achieving personal goals like a successful retirement. Check out the financial planning education we have in our Insights section to find more articles and videos and keep learning. If you’re ready to get a complimentary consultation, great! Let us know in the form below, we’re excited to hear from you. 

Schedule Complimentary Consultation

Select the office you would like to meet with. We can meet in-person, by virtual meeting, or by phone. Then it’s just two simple steps to schedule a time for your Complimentary Consultation.

Lenexa Office Lee’s Summit Office North Kansas City Office

Investment advisory services offered through Barber Financial Group, Inc., an SEC Registered Investment Adviser.

The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.