Financial literacy: ignorance is not bliss

Given the reality that many people don’t think about the adequacy of their retirement income or even think about talking to a financial adviser until they reach their late 40s, no one should be particularly surprised by the outcome of recent research suggesting that few Australians are really prepared for retirement.

However, recent research conducted by Mercer and released in mid-July pinpoints one of the key reasons for that unreadiness — a lack of financial literacy.

In layman’s terms, most Australians just don’t understand enough about handling their finances to appropriately prepare for retirement.

According to the Mercer financial literacy and retirement readiness study, while working Australians with low financial literacy levels may not understand how to improve their position, they at least understand that they will be less well-off in retirement.

However, the study made the obvious finding that those with low levels of financial literacy had a greater propensity to rely on government assistance once retired, and were less confident making financial decisions at home and in the workplace.

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The importance of the Mercer study is that its findings strongly validate the outcome of the recent Parliamentary Committee of Inquiry into how to improve the retirement savings of people aged under 40.

It also supports the findings of a recent public opinion poll conducted by Finsia, which revealed that the so-called X and Y generations believed they would have to work throughout retirement because the age pension would not exist and their superannuation would not be sufficient to meet their retirement needs.

Similarly, the Parliamentary Inquiry into the adequacy of retirement incomes for people aged under 40 pinpointed a growing recognition of the need for people to make better provision for their retirement, but noted that few had done so.

It was on that basis that the committee recommended a variation on the Government’s successful co-contribution regime, with every employee ‘voluntarily’ topping up the 9 per cent employer contribution with a further 3 per cent, unless they decided to opt out.

Equally, the Finsia research found that while the majority of under 40-year-olds were retirement literate and aware they could contribute a greater voluntary percentage to superannuation, 65 per cent did not do so.

Finsia chief executive Brian Salter said higher housing costs and education expenses were starting to have an effect, and Generations X and Y needed an easier way to save for retirement.

“The results question whether the Federal Government’s back-end focus on superannuation taxes will motivate younger Australians to save, given their retirement is decades away,” he said.

Salter said a scheme that entailed superannuation contributions of 12 per cent, unless employees explicitly opted-out of the 3 per cent increase, would be an improvement on the current system.

The Mercer study was aimed at gaining a better understanding of the varying levels of financial literacy in the community and was conducted in April, covering a random sample of 802 working Australians.

The research also entailed four focus groups aimed at uncovering the financial experiences of recent retirees.

The key findings of the Mercer study included:

n half of Australia’s working population have given, at best, some thought to retirement, but have made very little preparation;

n forty-nine per cent predict they will be less comfortable in retirement than they are now; only one in four expect their lifestyle in retirement will be as comfortable as it is now, and the remainder expect to be more comfortable;

n of the working Australians surveyed, on average, they expect superannuation to account for 43 per cent of their retirement funding;

n working Australians know little about their main superannuation fund, with three in five unsure of the style of fund they have, and a further two in five unsure of their current investment strategy; and

n those who expect to be a lot less comfortable in retirement than they are currently anticipate having to rely far more heavily on the Government. This group expects government assistance to account for 27 per cent of their total retirement funding, compared to 13 per cent for the study overall.

Commenting on the outcome of the research, Mercer chief executive Peter Promnitz said Australians weren’t prepared for retirement, and their understanding of superannuation and financial issues was generally poor.

“We applaud recent moves to make super simpler and more attractive, but there is a crucial step missing,” he said.

“In order to benefit, Australians must be knowledgeable enough about super and investments to make informed decisions.

“The impact on the bigger picture is that low levels of financial literacy may be hurting Australia’s ability to support an ageing population.

“It may also limit the quality of a person’s lifestyle in retirement, their overall financial wellbeing and confidence at work,” Promnitz said.

What will be of interest to financial planners are the Mercer survey findings that when working Australians were asked how they would rate their own knowledge about both investments and super, they scored an average of four out of 10, with less than one in five rating themselves ‘strong’ or ‘sophisticated’.

Survey respondents were also relatively unsophisticated about their current investment strategies, with the majority (59 per cent) rating themselves as a ‘beginner’, investing mainly in basic savings products.

A further 34 per cent of respondents considered themselves ‘intermediate’ level investors (investing in managed funds, shares and property).

The survey found that as financial literacy levels increased, so too did readiness for retirement, with one in three ‘savvy gurus’ having given retirement a lot of thought and having made considerable preparations, compared to only 5 per cent of ‘oblivious beginners’.

It found that as financial literacy levels declined, respondents anticipated having a far less comfortable retirement lifestyle.

“Over one in four ‘oblivious beginners’ anticipate being a lot less comfortable in retirement, while only a handful of ‘savvy gurus’ and ‘knowledgeable authorities’ expect the same level of discomfort,” the Mercer analysis said.

It said among ‘oblivious beginners’, the age pension was anticipated to comprise around 21 per cent of their overall retirement funding, while for their more literate counterparts, government pensions were expected to comprise far less of their retirement funding.

According to the Mercer research, the advantages of financial literacy also extend into the workplace, with financially literate employees more confident in making financial decisions on behalf of their employers.

It found that the majority of ‘savvy gurus’ and ‘knowledgeable authorities’ were very or somewhat comfortable in making financial decisions on behalf of their employer, compared to only 22 per cent of ‘oblivious beginners’.

According to the national business leader of Mercer Wealth Solutions, David Anderson, financial decisions in the workplace might include reducing business operating expenses, growing sales, setting prices for goods and services and preparing annual budgets.

“There is an obvious advantage for employers to become advocates for improving levels of employee financial literacy,” he said.

Anderson said employers had an important role to play in bringing financial education to the workplace.

“Firstly, it is good for an employer’s business and secondly, it is good for the community’s overall financial wellbeing now and in the future,” he said.