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Does Your Financial IQ Put Your Retirement at Risk?

Category: Financial and taxes in retirement

July 30, 2013 — We were shocked to read recently that 86% of Americans couldn’t ace a simple financial IQ test. Fortunately, we are pretty sure that Topretirements members are like the children in Lake Woebegone – you are all certainly above average! This article provides link to that quiz so you can see how well you do on it. We will also provide a recap of 10 commonly held pieces of financial wisdom, along with links to more resources to help get you educated.

Here is where you can take the finra financial literacy quiz. The quiz ask simple questions about how much interest you would earn at different rates, safety of stocks vs mutual bonds, and what happens to bonds when interest rates change.

Why Your Financial IQ Matters
Retirement is increasingly a do-it-yourself project. While a fortunate few can count on generous pension payments, most of the rest of us will have to rely on Social Security and our retirement savings. Even many people who thought they had a nice pension have had bad news about that lately, notably employees of the City of Detroit.
In other words, the buck starts and stop with you. You are your own portfolio manager, like it or not. Of course you can hire someone to do it for you, but you are responsible for selecting and managing them – if they mess up it will be you holding a shattered retirement.

Some Good Financial Principles to Think About
First of all, we at Topretirements are not financial or investment experts. But we can summarize some of the more common tips that are consistently mentioned as good practice. The goal is to make sure you live as comfortably as you can in retirement, without running out of money. Here goes, 10 financial principles to help you protect your finances in retirement.

1. Diversify. The adage to avoid putting all your eggs in one basket is always good advice. Don’t keep all your money with one manager, or invest too much in one kind of asset. That way if something bad happens, you won’t be out all your money. Mutual funds are usually safer than a concentration in stocks for the same reason.

2. Be age appropriate. Financial experts advise young people to be heavy in stocks because they can take more risk in exchange for growth, since they have a long enough horizon in which to weather different economic climates. Retirees, however, don’t have that luxury. As so many retirees learned 5 years ago, if a stock market crash occurs when you need the money, it is gone forever. A balanced portfolio including a percentage in bonds, fixed investments, or annuities is more appropriate than a high concentration in stocks. There are plenty of places on the web, including most of the mutual fund companies, that can show you what the right balance should be for your age and appetite for risk.

3. Know the relationship between bond prices and interest rates. This was one of the questions on the finra quiz. You don’t want to be caught holding a pile of 30 year bonds if interest are rising, because the value of your bond will fall to make up for that. Financial advisors usually recommend a “laddered” approach to bond maturities to protect you against interest rate volatility.

4. Don’t try to time the market. The common wisdom is that very few people are smart enough to time the market. Buy and hold strategies usually prevail over timing strategies, unless you are very lucky. Nobody can predict when market bottoms and tops will occur.

5. Find a good mutual company. Mutual funds are a good investment vehicle in our opinion. They offer funds of every type – from high growth to utilities to tax free bonds – just about any type of investment you could want. But because they hold baskets of individual stocks and bonds they are much less prone to volatility than you holding just a few individual investments.

6. Consider a qualified and competent financial advisor. A good financial advisor can ensure your financial future, reduce your risk, and save you a lot of work. They might also be helpful if have debts or need assistance in developing an estate plan. An incompetent one can lose your life savings, or do worse than a bank CD. There are many individuals who hold themselves out as financial advisors with a bewildering array of degrees and certifications. Don’t hire your brother-in-law without spending some time researching, though. Ask for references, and check them out. Have the candidates explain how their investment philosophy, as well as their fees. Look at their degrees and certifications. Ask to see a track record for the last 10,5, and 1 years. Some of the certification organizations can help with referrals.

7. Compare fees. A financial advisor might charge you a fee of 1% or more of the assets you have invested with them, depending on the size of your portfolio. Different mutual fund companies charge very different fees. We personally have had good experience with Vanguard – low fees and good service. Others we know swear by Schwab and Fidelity, among others. Mutual funds are obligated by law to tell you what their fees are, so they are easy to compare.

8. Figure our your retirement budget – before you retire. Too many people enter retirement without a clear idea of how much they can safely spend while relying on their income and savings. List all your expenses, assets, and income. When you arrive at the figure you can spend, stick with it. If you raid the piggy bank too often you will probably find yourself eating beans at the end of your life. See our “Retirement Budget Worksheet

9. Don’t Panic. People who have lived as long as us baby boomers should realize by now that the market will have periodic big ups and downs. So far, it has always come back from downturns, now matter how bleak they looked at the time. Indeed, many of the most successful investors only buy stocks when the “blood is on the street”. Speaking for ourselves, the worst thing you can do is sell everything when the market hits a horrible bottom.

10. Have an up to date will. If your estate is simple, you might be able to get along with a very simple one from a book or online source. If your assets are large, getting an experienced estate attorney is definitely in order. Whatever route you go, make sure you have a recent will in place, and that your next of kin knows where it can be found.

Bottom Line
Your goal is to get you (and your spouse) to the finish line without running out of money. Since you are in charge of your financial future, it is your responsibility to understand some basic financial principles to help ensure it. Be curious, ask questions, pay attention to current events, and stay on top of your financial statements. If your spouse is not comfortable managing money, you had better come up with a strategy for how it will be managed once you are gone.

For further reference:
Be sure to take our new “What is Your Social Security IQ Quiz“. It will give you a score and detailed explanations to make you a Social Security expert.
Money 101 (CNN Money)
Do Retirees Need Financial Advisors (US News)
Choosing the Safest Investment Path (Jane Bryant Quinn)
7 Fantasies That Could Wreck Your Retirement (Topretirements)
Can You Afford to Retire: And What to Do If You Don’t Like the Answer

Comments. Please share your thoughts about important things to keep in mind while managing your financial future in the Comments section below.

Posted by Admin on July 30th, 2013


  1. Older but not necessarily wiser: A study by researchers from the Federal Reserve Board, Harvard, and New York University found that our financial acumen peaks around age 53. After that, it’s slowly downhill. Something to keep in mind! And, of course, most people don’t believe it applies to them, which is even more dangerous.

    Jan Cullinane, The Single Woman’s Guide to Retirement (John Wiley & Sons)

    by Jan Cullinane — July 31, 2013

  2. I am 58 years old and have lived through ups and downs of the stock market and real estate. I’ve learned not to panic when markets go down and not get too giddy when they’re up. I can see where panic can set in if your portfolio is not balanced – too much invested in stocks and/or real estate. You need to have a balance of investments appropriate for your age. Good article. :mrgreen:

    by glenns — July 31, 2013

  3. I’ve been trying to “join” your website, but the keep getting a message that the verification code is wrong. I’ve tried several codes, several attempts! Very frustrating. 🙁 I also tried the “contact us” page, with the same result. I tried calling the phone number… rings once then nothing. What’s up? Sorry for posting off topic here, but couldn’t figure out any way to reach anyone. Thanks…

    Editor’s Comment: Dear Topretirements members. We had a temporary issue with the registration system as we work on some improvements. When you login to Topretirements please make sure that you check the “Remember Me” box. That should log you in properly. However, you can visit all of the pages on this site without registering or being logged in. However, you can’t post to the Forum or modify a city review without being logged in.

    by Jackie — August 2, 2013

  4. This comment came in from Linda, who always has some great insights:

    If you do another article on the financial aspect of retirement, tell people to establish what ever credit cards they would like to have before they quit working.

    I have learned the hard way that I no longer qualify for new credit cards as I now have a negligible income! (Even though I have an excellent credit rating.)

    by Admin — October 14, 2013

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