Is your
Financial Health at Risk? money maladies A series of national surveys commissioned by Northwestern Mutual to look at the financial behaviors of Americans.
Are you suffering from
money maladies? When anticipating your financial future, do you say one thing, yet do another? If so, you’re not alone. An ongoing survey of American adults reveals a critical disparity between people’s retirement goals and the steps they are taking to achieve them.
An accurate diagnosis leads to realistic remedies. The Money Maladies research examines not only what Americans do with their money, but also why they manage their finances as they do. Survey results consistently show that people’s financial well-being is growing more uncertain due to a series of unhealthy financial habits. Even more, today’s extraordinary geopolitical and economic events continue to cloud Americans’ beliefs and behaviors concerning their finances. While there is no “magic pill,” there are remedies you can use to strengthen your financial health.
Read on to learn more about the symptoms of Money Maladies and ways to treat them….
Common symptoms of
money maladies Living a Financial Fantasy T he widening gap between what Americans think they are doing to prepare for their financial future and what they are actually doing may affect their retirement years. Plus, world events such as September 11th, wars and America’s fluctuating economy have caused Americans to have conflicting feelings about their own financial preparedness. •O ne-third have not begun to plan or save; one-quarter don’t know how much they’ve saved.
•S even out of 10 Americans are comfortable with the amount of financial preparation they’ve done for their future. Yet, only 10% feel completely financially secure.
•O ne-fifth spend more than 75% of their monthly income each month, while one-quarter do not save anything at all on a monthly basis for long-term goals, such as retirement or a child’s education.
[symptoms]
Take control of your financial future by modifying your behaviors with financial management techniques. Consider both short- and long-term strategies: •S ave a tax refund. If you receive a tax refund, save it, don’t spend it. You might also consider re-evaluating your withholdings. More than 50% of Americans spend their refund, rather than save it.
• I ncrease your savings. Put aside the extra money you get at raise and bonus time so you won’t miss it.
•G et an annual “checkup.” Review your plans and monitor your savings. To be sure your actions will help you realize your goals, seek the counsel of an expert and get a second opinion, if needed.
[remedies]
Inheriting Poor Savings and Planning Habits
• I n a 2005-2006 biennial study conducted by the Jump$tart Coalition on Financial Literacy that measured the financial knowledge level of 12th graders across the US, the average student only scored a 52.4%, and nine in 10 indicated they learned what they know about managing money “at home from my family.”
•7 1% of Americans expect to pay for some of their children’s college education, yet 58% have saved less than $5,000, and 33% have saved less than $1,000. Among parents across the country, 29% indicated they are not sure the actual costs of a four year college, which makes preparing for it difficult.
[symptoms]
college
Family, rather than experts, is the greatest influence in shaping Americans’ financial attitudes and behaviors. However, most adults today did not discuss money matters with their parents when growing up and may not know how to talk with their own children. Further, most parents are not using financial self-discipline and may be setting a poor example for their kids.
Source: 2006 Northwestern Mutual Study
[remedies]
In addition to the ABCs, parents should teach their children about basic money management.
• Talk to your children often about money matters. Consider outside resources, such as TheMint.org, to help your kids grow up financially literate.
•T each them finance fundamentals. Explain the importance of saving and delayed gratification. Set a good example. Use the concept of a 401(k) program by matching contributions to your children’s savings. Call it 401(kids).
•S tart saving for college now. Take advantage of college funding programs, such as 529 Plans, Education IRAs or permanent life insurance. With the skyrocketing costs of college, the sooner an account is started, the better.
•M odel good financial behavior. Children learn by observing adults. What do your actions say?
mployers have become the acting Chief Financial Officer for most Americans E by providing insurance coverage, 401(k) plans and credit unions. However, many employees are not taking full advantage of available tools or supplementing existing coverage.
any people buy term insurance because it is less expensive or on the advice to M “buy term and invest the rest.” However well intentioned, most people who plan to invest the rest simply don’t follow through.
• Only 6% with 401(k) plans contribute the maximum that is matched.
• 70% of job changers do not roll over their 401(k) plans.
•O nly 23% own individual disability income insurance.
•L ess than 60% own life insurance outside of their employer.
•5 5% of Americans believe if you leave your employer you can take your group life insurance with you.
[remedies]
•U tilize employer plans. Whether it’s a 401(k), or an educational training program, take advantage of it. Contribute as much to your 401(k) as possible and at least the maximum amount your employer matches.
•B e smart at raise time. Consider saving at least a small percentage of your raise.
•T alk with a financial expert to make sure you have adequate insurance coverage. While most Americans see its value, most do not have adequate amounts of insurance (life, disability and long term care insurance). As time goes on and your family and financial situations change, so too will your insurance needs. Be sure to re-evaluate all your financial needs, including insurance, to reflect these changes.
•O nly 14% of those owning term life insurance invest all the money they save by buying term every year.
•W hile 75% say they bought term insurance as a way to save money for long-term financial goals, less than half say they have a plan in place to meet their financial goals.
• They feel more financially secure overall (23% more secure).
• They’re more prepared for a major financial setback (13% more prepared).
• T hey’re convinced they’ll have enough money to live comfortably throughout retirement (11% more confident).
On the other hand, permanent life insurance owners feel significantly more confident about their financial situation than those with only term life insurance.
Talk to a financial expert. A good financial professional can help you understand your individual insurance needs and risks, and identify products that offer the best solutions for your particular situation. For some, it’s term insurance and for others, permanent insurance. For many, it’s a combination of both.
[remedy]
[symptoms]
Protecting What You Have
[symptoms]
Ignoring Available Resources
Life Insurance Life Insurance Needs Needs What they’ll do for coverage when their term life insurance policy(ies) expire: 2003 Northwestern Mutual survey of adults who own only term insurance, or at least one permanent life insurance policy. Online survey conducted by Harris Interactive (margin of error is +/- 4%).
42% Not sure 2% Other 3% Buy a permanent policy
32%
Won't need coverage
21% Buy a new term policy
Saving for a Rainy Day Many Americans say they can’t afford to save after taking care of their immediate financial responsibilities. • Half are not paying off credit cards each month.
• Over 80% say high monthly expenses are obstacles, and nearly 90% say keeping money available is difficult.
• One-quarter don’t save anything at all for long-term goals.
•O ne in five report that over 75% of their monthly income is consumed each month and another 10% is used for short-term goals (clothes, electronics, etc.).
[symptoms]
Establish separate accounts for long-term goals: •P ay yourself first. Make saving and investing part of your regular budget – just like paying the electric bill.
• Start an “emergency fund.” Make sure you have enough saved to cover at least 3 months of expenses. Automatically deduct money from your paycheck.
• Start a “fun fund.” Reward yourself, but don’t make it your biggest fund.
[remedies]
Source: 2006 Northwestern Mutual Study
Perpetuating Bad Habits
[symptoms]
ld habits die hard for most Americans who tend to set arbitrary yardsticks for their O financial decision making. Rather than developing a strategy, many use a “knee-jerk” approach when making financial decisions and put off talking with a financial professional, even when they feel the need to talk to one. Using outdated, uninformed, or subjective measures can have a far-reaching, negative impact on the choices made.
• I n recent years, many people have made reactive decisions on their own to change retirement plans and investment portfolios.
•N early one-third of Americans feel an increased need for advice from a financial professional, but of those, 63% have not yet spoken with one.
•M ental accounting allows Americans to treat one dollar differently than another dollar. People spend time clipping coupons to save pennies, yet fail to spend time making investment decisions where small changes can have large effects.
•M any suffer from in-group bias, preferring to get advice from others like themselves rather than going to an outside expert.
•P eople are plagued by decision paralysis. Americans are overwhelmed when confronted with too many options. As a result, they do nothing.
•M ake a commitment to consult with a financial professional to determine the best course of action for your situation. Most Americans who have met with an expert feel more secure than those who have not.
•M ake a plan you can live with. View your financial future as a long-term process. Avoid reacting to issues outside your control.
•U se the Internet for information. It offers a variety of sites to help you calculate your lifetime needs. Visit the Learning Center on www.nmfn.com for a list of calculators, including the popular Longevity Game, found at www.longevitygame.com.
[remedies]
money maladies 2006 The State of America’s Financial Knowledge An in-depth look at the financial aspirations, behaviors and knowledge of Americans.
How do you measure up? Money Maladies continue to affect all Americans. In an age of abundant financial resources, many Americans continue to struggle with their financial behaviors. A new study commissioned by Northwestern Mutual in 2006, examined how much the general population knows about a variety of subjects that compose a financial strategy. The study looked at three aspects of sound financial strategies: •A spirations – What they’re looking for out of life regarding their financial goals. •B ehaviors – Whether they’re taking the necessary actions to achieve their aspirations. • Knowledge – What they actually know and understand about the complexities of a long-term financial strategy.
Aspirations
Knowledge
•W hen they want to retire: The average anticipated retirement age is 62, although those with greater income or assets tend to anticipate a slightly younger retirement age.
•K nowing how to allocate assets: While most may be able to correctly identify a description of asset allocation, they fall short in knowing how to allocate their assets to achieve their financial goals – for example, only one in three correctly identified stocks as the best long-term protection against inflation.
•W hat keeps them awake at night when looking ahead to retirement: Three in four point to concerns over high health care costs; six in 10 are concerned about having adequate income; one in four are worried that they’ll be unable to maintain their current lifestyle. •H ow much they think they’ll need in retirement: Experts suggest 80% of one’s pre-retirement income, but most Americans think they will, on average, need 71%.
Behaviors •H ow they are saving for the short and long term: Six in 10 have an employersponsored retirement account such as a 401(k) or 403(b); a large majority have a savings account, but fewer than half own an IRA, stocks or mutual funds. •S aving for college: Half have children they would like to send to college and most expect to pay for at least some of that cost, but only a small share have a goal for how much they would like to save. They estimate college will cost about $100,000, but most have saved less than $20,000. •S aving for emergencies: Nearly half have set a goal for emergency savings, yet 31% have saved less than $1,000 for these situations.
•K nowing the value of a 529: In spite of years of publicity regarding their availability, less than half of Americans know that “529” plans are meant as savings vehicles for education. •U nderstanding index funds: Less than one in four understand the purpose of an index fund. •T he insurance impact of leaving a job: Only four in 10 understand there is a significant insurance impact of leaving their job if they have group life or disability coverage. •R ealizing the benefits of whole life: Less than half understand the benefits of whole life insurance – for example, less than half were aware that a whole life policy can pay dividends, and only one in four knows that the cash value these policies earn is tax-free. •K nowing the costs of a nursing home stay: Only one in four have a realistic idea of the cost of a year-long stay in a nursing home. The current average is approximately $75,000, however most estimate the cost to be less than $60,000. •W orking with a financial professional: Only one in four work with a financial professional. Those who do tend to score better on the financial knowledge test than those who do not.
Americans and IRA’s
•W orking with an financial professional: Only one in four work with a financial professional; half say they make their decisions regarding their financial future completely on their own; most turn to the Internet for information; others turn to friends, family or financial publications.
Source: 2006 Northwestern Mutual Study
Men, Women and Finances The study also took a closer look at how men and women, particularly those with household incomes of $75,000 or more, approach financial matters. What the study revealed is men and women, in many instances, have different aspirations and priorities when it comes to their financial future. •W omen: It’s ‘Our’ Decision – Six in 10 women view household financial decisions as a joint activity within the family, whereas less than three in 10 men view it as such. •M en: Let’s Invest – 70% of men own stocks, and 65% own mutual funds, while only half of women own stocks and 46% own mutual funds. •W omen: Worried about Retirement – Six in 10 women expressed concern about not having enough saved for their retirement lifestyle, while less than 40% of men share this same concern. •W omen: Protecting from a Disability is a Priority – Half of women indicated protecting their income from a disability is “very important to them,” whereas only a quarter of men share these sentiments.
Gauging Where Your Knowledge Falls... Want to see how you stack up in your financial knowledge as compared to Americans as a whole? Visit www.moneymaladiestest.com for a brief version of the latest survey, to assess your financial knowledge and provide you with recommendations based on your responses.
...finding your right solutions There is no one-size-fits-all solution to America’s Financial Future. Rather, it’s important that you take a closer look at your financial situation and examine what areas you may need to address. Consider these three principles that are beneficial to anyone:
Get on the
road to recovery!
I t’s never too soon to become an effective money manager. And it’s never too late to improve your financial well-being. Contact a Northwestern Mutual Financial Network representative and learn how you can treat your Money Maladies. Preserving your freedom to choose your own future is the true measure of optimum financial health.
• Map Your Financial Future – When you’re in a new city, you need a map to get oriented. Same holds true for your finances. Look at where you are and think about where you want to be. Then put together a strategy to get there. Working with a professional is a great start. Visit www.nmfn.com to find an expert near you.
Survey Methodology
•S tay Insured – Insurance protects you from financial disaster. Be sure all your bases are covered to avoid disaster, including medical, vehicle, home, disability and life insurance.
The original study was conducted by Harris Interactive in the fall of 2000 with a nationwide cross-section of 1,279 adults between the ages of 21 and 69 who are the primary financial decision-makers in their households. Three subsequent studies, also conducted by Harris Interactive, were conducted in the fall of 2001, summer 2002 and fall of 2003 to re-examine a cross-section of primary household financial decision making adults in this same age range with annual household incomes of $75,000 or more.
•P ay Yourself First – Set aside an affordable amount of money each month for yourself BEFORE paying pills. This allows you to enjoy the labors of your hard work.
Designed to delve into the causes of America’s financial behaviors – and misbehaviors – several Money Maladies surveys have been conducted on behalf of Northwestern Mutual.
In the spring of 2006, Northwestern Mutual released results of its most recent Money Maladies survey, conducted by Mathew Greenwald & Associates, which looked at aspects of a sound financial strategy among Americans. It included a test that examined Americans’ financial knowledge of subjects that compose a sound financial strategy, including saving and investing, risk and protection, and retirement. The survey featured responses from more than 1,000 interviews, conducted of respondents between the ages of 25 and 65, with annual household incomes of $35,000 or more, and half of households with incomes of $75,000 or more.
Money Maladies Advisory Panel Thomas Gilovich is a professor at Cornell University’s Cognitive Studies program and author of the books Why Smart People Make Big Money Mistakes And How to Correct Them: Lessons from the New Science of Behavioral Economics and How We Know What Isn’t So. Mark Schug is director of the University of Wisconsin Milwaukee Center for Economic Development and serves as a consultant to the National Council on Economic Education and the Political Economy Research Center, in addition to many school districts and organizations.
For More Information Further information on Money Maladies can be found at www.moneymaladies.com, where you can also take a Financial Check-Up to diagnose your maladies. Also, consider helping your kids learn smart money habits early by encouraging them to visit www.TheMint.org, for money-saving tips they can take with them as they grow. Please call your nearest Northwestern Mutual Financial Network representative to learn about these studies and more to help you uncover early warning signs of money maladies. Find out today how you can improve your financial health.
Northwestern Mutual Financial Network is the sales and distribution arm of The Northwestern Mutual Life Insurance Company, Milwaukee, Wisconsin. The Northwestern Mutual Life Insurance Company • Milwaukee, WI www.nmfn.com 19-0146-01 (0301) (REV0706)