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Feb. 12, 2021, 2:06 p.m. EST

All the ways older people mismanage their money — and how to avoid them

Young people may lack financial literacy. But seniors aren’t always so smart when it comes to money, either.

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By Morey Stettner


Young people are maturing faster than ever. From launching businesses to tracking climate change, they’re racing to accept the responsibilities of adulthood.

But when it comes to financial savvy, their growth stalls. Ages 18-34 showed the steepest drop in financial literacy, according to a FINRA Investor Education Foundation study.

If young adults lack basic financial knowledge, does that mean seniors are smarter when it comes to money?

Not necessarily.

Retirees’ awareness of key financial concepts is hit-and-miss. A lifetime of experience saving and spending does not always translate into a thorough understanding of budgeting, investing and portfolio management.

Read: How much income will your 401(k) provide?

“The game changes as you get into your 60s,” said Dan Keady, chief financial planning strategist at TIAA. “We see pretty big deficits in that group” in terms of financial literacy.

For example, he finds that many people take Social Security too soon—sometimes as early as age 62—without fully grasping the importance of longevity planning. The allure of obtaining instant cash can be hard to resist, even if waiting a few years would result in a greater payout.

Read: Will working longer save your retirement?

Speaking of longevity, seniors may place undue emphasis on the “risk-free” promise of a multiyear certificate of deposit or an online savings account. They gain peace of mind knowing their funds sit safely in a federally insured bank, without considering whether there’s a better strategy.

“They may think that they can take care of risk with one product like a CD,” Keady said. “But there’s an opportunity cost of not diversifying with stocks and bonds”—and the cost increases the longer they live.

Older people may adopt a CD ladder strategy, thinking it’s a prudent way to lock in higher yields over time. But a gap in their financial literacy can lead them to buy multiple CDs, even though this approach makes less sense in the current low interest rate environment.

“Many of them have heard about CD laddering,” said Megan McCoy, director of the financial planning Masters program at Kansas State University. “But its benefits are fading.”

Some seemingly simple concepts can prove vexing to seniors. Consider the term “lifetime income.”

Aging investors may assume that with a few million dollars stashed away, they’ve amassed a sufficiently large cash pile to draw upon for the rest of their life. They may think income and dividends generated by their portfolio will pump out enough money as long as they live.

Yet with interest rates so low, it’s harder to squeeze even modest income from savings. And the S&P 500 annual dividend yield , which never fell below 3% between 1871 and 1960, averaged a measly 1.97% between 2009 and 2019.

“There’s a general lack of understanding about lifetime income,” said Michael Finke, a professor of wealth management at the American College of Financial Services in King of Prussia, Pa. He adds that older people who explore other investment options, such as income annuities, are more likely to safeguard their nest egg.

Even seniors who are smart investors may underestimate their ability to retain their financial literacy as they age. That’s why drafting and implementing a reliable plan that produces sustainable lifetime income is so crucial.

“By the time you get into your 90s, you cannot manage your finances as well as when you were in your 60s,” Finke said. “So put yourself in a position where you won’t have to make complex investment decisions in your 90s.”

Morey Stettner is a personal-finance columnist for MarketWatch. He is the author of "The New Manager’s Handbook."

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