Most retirees report their major concern to be whether their money will last as long as they do. But maybe, as the old saying goes, it’s not what you’ve got but what you do with it that really counts. That’s where your financial literacy comes into play. Whether you start retirement with a modest nest egg or more significant savings, it’s how you manage this money across your retirement journey that will matter the most.
What is financial literacy and why should you care?
As defined by the OECD International Network on Financial Education, financial literacy is
“a combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and ultimately achieve financial wellbeing”.
According to the highly comprehensive Australian Government’s Retirement Income Review in 2020, financial literacy can be a major barrier to higher retirement income because a lower level of financial literacy is associated with:
- Lower super balances
- Lower willingness to take financial risk
- Shorter savings horizons
- Being less likely to set up a retirement plan
- Being less informed about pension rules
- Paying higher investment fees
- Not diversifying pension assets
Can you measure your literacy?
The short answer is yes. This quick quiz was included by research organisation Household, Income and Labour Dynamics in Australia (HILDA) in its annual survey of 17,000 adults from 2016 onwards. In 2018, the results showed that just 50% of men answered all questions correctly, and only 35% of women. They also revealed that respondents aged 55 to 64 scored 4.2 out of 5 in 2016, but this had declined to 4.1 in 2020.
Why don’t you see how you go?
Here are the five questions (the answers are at the end of the quiz):
- Numeracy
Suppose you put $100 into a no-fee savings account with a guaranteed interest rate of 2% per year. You don’t make any further payments into this account and you don’t withdraw any money. How much would be in the account at the end of the first year, once the interest payment is made?
- Inflation
Imagine now that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, would you be able to buy more than today, exactly the same as today, or less than today with the money in this account?
- Portfolio diversification
Do you think that the following statement is true or false? ‘Buying shares in a single company usually provides a safer return than buying shares in a number of different companies’.
- Risk versus returns
Again, please say whether you think the following statement is true or false: ‘An investment with a high return is likely to be high risk’.
- Money illusions
Suppose that by the year 2024 your (net) income has doubled, but the prices of all of the things you buy have also doubled. In 2024, will you be able to buy more than today, exactly the same as today, or less than today with your (net) income?
What’s your score?
The answers to these questions are:
- $102
- Less
- False
- True
- Exactly the same
Don’t worry, there’s a solution
Five out of five is great, four out of five is ok. But getting a lower score doesn’t mean you have to rush off to evening classes to make up the gaps.
To return to the findings of the Retirement Income Review, actual financial education may not be the answer. It noted that some qualitative research conducted for Super Consumers Australia (2020) indicated that people did not want to be educated about superannuation; instead, they wanted assistance in making decisions.
That makes sense. None of us have the answers to every financial decision we have to make. And only a handful of people know all the rules of super, Age Pension entitlements, estate planning, tax and investment. There are far too many and they are just too complex. But seeking affordable assistance in the form of bite-sized advice at different points along your retirement journey is within your reach. Here are a few of the ways our advisers can help with your own retirement income concerns along the way:
Retirement Forecasting – assists you to develop a safe spending plan and see how your assets and income could look in the future.
Understanding more about your super – helps you to assess the options to make your super work harder and better.
Maximising your entitlements – allows you to see if you can make any changes to maximise your Centrelink entitlements.
Your home and your mortgage – considers the benefits of repaying or maintaining your mortgage in retirement.
Were you happy with your score?
If not, was this short quiz useful anyway?
Are there better ways to measure financial capability?
I am carer for 92 year old Mum, she has Dementia and has just sold her shares as they were just confusing for her and it was frustrating her. She has approx $40,000 from them and about $22000 ANZ and $7000 in a daily use accountt. will putting that money into a term deposit say $50-$60 k be a good idea and not affect her pension?
Hi John, in terms of what is the best financial option for the money, you would be best to speak with one of our specialists about maximising Mum’s entitlements (BOOK HERE)
Yes
The quiz was so ridiculously easy that I doubt anyone would score less than 5
I’m a little worried about your answer to Money Illusions.
For example, using 2024 tax rates, a person on income of $100,000 will be entitled to SAPTO and net income after tax would be $77,212.
A person on $200,000, not entitled to SAPTO, net income is $139,862.
If all of the person’s income $77,212 is being used to pay rent and other expenses, and this has doubled to $154,424, the person would have a shortfall of $14,562.
Therefore the answer changes to LESS
I found these questions very easy and am somewhat sceptical of their value in assessing financial literacy. Surely a better test would include questions about the meaning of financial terms and the nature of financial arrangements and processes? This should provide a better feeling about how well we understand what is being done with our money.
I thought the financial quiz was a good check – or wake up call – depending on your result
this type of thing should be taught in school.
I believe there needs to be more education about “Reverse Mortgages” a lot of retirees are going to get burnt by glossy advertising they’ll most likely regret. You need to educate the masses!
Hi , I’m 68 . I get a part age pension. My wife as just reached an age where she can claim the pension. If she applies she will push us over the limit. So would not get the pension.
Are obligated to apply or can we leave things as they are .
Martyn
Hi Martyn, you are not obligated to apply for your wife to get the pension but you are, and have been, obligated to keep Centrelink updated of your and your wife’s income/asset position. If you continue to receive payments that you are no longer entitled to Centrelink will ask for it to be repaid when they find out regardless of how long it takes for them to find out. I strongly recommend you update Centrelink on your and your wife’s complete income/asset situation as soon as possible to avoid any over payments that will then need to be repaid.
Whilst your quiz was easy for anyone with basic maths skills my past experience as a red cross volunteer supporting the elderly and infirm leads me to believe many people will struggle with the quiz assuming of course they have the skills to access your online site.
The big question is how to give this group the assistance they need to manage their affairs.
I will get $250,000 medical
Negligencia I over 75 your advice as where to invest ?
Thank you
Hi Isabella, we’d be happy to help you maximise your entitlements via one of our consultations that you can book HERE.
I found your quiz quite easy but still useful in showing I am not a financial idiot. I was LUCKY in working 50 years for Commonwealth Govt and being in best ever super scheme -the CSS. I also had an excellent financial planner. My advice to all is to set up your super scheme early, have a good planner (unless you are very good yourself) and ensure you have paid off all mortgages before retiring.
Do NOT neglect your super until too late.
If you DO end up seeking a part or full Centrelink pension be prepared for a long and torturous process!
You have to pay tax on your CSS pension.
In all honesty if you want to avoid the heart ache of applying for a pension or CHSC with Centrelink use Retirement Essentials. We got it done for my husband’s Pension no hassle, so easy to deal with… Worth absolutely every penny.
I made the BIG mistake of applying for a CHSC by myself with Centrelink. I booked an appointment that in itself was a chore. Sat down with them at their office had all my documents everything was ticked off and faxed to another department.
9 weeks later received an email from myGov wasn’t addressed to anyone so could have been for the dog for all I new. Logged into myGov account my application was denied. Why you ask? Because they didn’t have all the documents they required. However I could not find what documents were missing in order to resend them. Again another appointment at the Centrelink local office they checked my details all forms were showing as lodged. Supposedly that fixed it they made some calls all good. Ha! Another 8 weeks later received another email from myGov that my claim was not approved due to missing documents. This time I called Centrelink one and a half hours waiting on the phone finally spoke to someone (you never get the same person twice even when booking an appointment at the local office).
He checked documents were missing, while I waited for him to check into something else all docs were found. No problem all in hand it should be processed in a few days. Ha!
Another 8 weeks later another email re missing documents. Booked yet another appointment went into the local office saw the manager who thankfully took control of my case. She sent me home. Called an hour later everything was finalised all documents were located my claim was successfully processed, with many apologies.
I now know never, ever, to deal with Centrelink direct. At the time I wasn’t aware that Retirement Essentials did CHSC.
I will have them do my pension application when the time comes in a few years.
Centrelink… every step dealing with them was so difficult and stressful.
Thank you Steven for making my Hubby’s pension claim so easy.
Thank you for the compliment Susan, we look forward to helping you get your share of the pension when you become eligible.