MONEY Savings

5 Signs You Will Become a Millionaire

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Martin Barraud—Getty Images

A million isn't what it used to be. But it's not bad, and here's how you get there.

A million bucks isn’t what it used to be. When your father, or maybe you, set that savings goal in 1980 it was like shooting for $3 million today. Still, millionaire status is nothing to sniff at—and new research suggests that a broad swath of millennials and Gen-Xers are on the right track.

The “emerging affluent” class, as defined in the latest Fidelity Millionaire Outlook study, has many of the same habits and traits as today’s millionaires and multimillionaires. You are in this class if you are 21 to 49 years of age with at least $100,000 of annual household income and $50,000 to $250,000 in investable assets. Fidelity found this group has five key points in common with today’s millionaires:

  • Lucrative career: The emerging affluent are largely pursuing careers in information technology, finance and accounting—much like many of today’s millionaires did years ago. They may be at a low level now, but they have time to climb the corporate ladder.
  • High income: The median household income of this emerging class is $125,000, more than double the median U.S. household income. That suggests they have more room to save now and are on track to earn and save even more.
  • Self-starters: Eight in 10 among the emerging affluent have built assets on their own, or added to those they inherited, which is also true of millionaires and multimillionaires.
  • Long-term focus: Three in four among the emerging affluent have a long-term approach to investments. Like the more established wealthy, this group stays with its investment regimen through all markets rather than try to time the market for short-term gains.
  • Appropriate aggressiveness: Similar to multimillionaires, the emerging affluent display a willingness to invest in riskier, high-growth assets for superior long-term returns.

Becoming a millionaire shouldn’t be difficult for millennials. All it takes is discipline and an early start. If you begin with $10,000 at age 25 and save $5,500 a year in an IRA that grows 6% a year, you will have $1 million at age 65. If you save in a 401(k) plan that matches half your contributions, you’ll amass nearly $1.5 million. That’s with no inheritance or other savings. Such sums may sound big to a young adult making little money. But if they save just $3,000 a year for seven years and then boost it to $7,500 a year, they will reach $1 million by age 65.

An emerging affluent who already has up to $250,000 and a big income can do this without breaking a sweat. They should be shooting far higher—to at least $3 million by 2050, just to keep pace with what $1 million buys today (assuming 3% annual inflation). But they will need $6 million in 2050 to have the purchasing power of $1 million back in 1980, when your father could rightly claim that a million dollars would make him rich.

Read next: What’s Your Best Path to $1 Million?

MONEY Kids and Money

The High School Class That Makes People Richer

Graduates with $$ on their caps
Mark Scott—Getty Images

Kids really do benefit from learning about money in school, new data show

Most experts believe students who study personal finance in school learn valuable money management concepts. Less clear is how much they retain into adulthood and whether studying things like budgets and saving changes behavior for the better.

But evidence that financial education works is beginning to surface. Researchers at the Center for Financial Security at the University of Wisconsin recently found a direct tie between personal finance classes in high school and higher credit scores as young adults. Now, national results from a high school “budget challenge” further build the case.

Researchers surveyed more than 25,000 high school students that participated in a nine-week Budget Challenge Simulation contest last fall and found the students made remarkable strides in financial awareness. After the contest:

  • 92% said learning about money management was very important and 80% wanted to learn more
  • 92% said they were more likely to check their account balance before writing a check
  • 89% said they were more confident and 91% said they were more aware of money pitfalls and mistakes
  • 87% said they were better able to avoid bank and credit card fees
  • 84% said they were better able to understand fine print and 79% said they were better able to compare financial products
  • 78% said they learned money management methods that worked best for them
  • 53% said they were rethinking their college major or career choice with an eye toward higher pay

These figures represent a vast improvement over attitudes about money before the contest, which H&R Block sponsored and individual teachers led in connection with a class. For example, among those surveyed before and after the contest, those who said learning about money was very important jumped to 92% from 81% and those who said having a budget was very important jumped to 84% from 71%. Those who said they should spend at least 45 minutes a month on their finances jumped to 44% from 31%.

The budget challenge simulates life decisions around insurance, retirement saving, household budgets, income, rent, cable packages, student loans, cell phones, and bank accounts. Teachers like it because it is experiential learning wrapped around a game with prizes. Every decision reshapes a student’s simulated financial picture and leads to more decision points, like when to a pay a bill in full or pay only the minimum to avoid fees while waiting for the next paycheck.

Block is giving away $3 million in scholarships and classroom grants to winners. The first round of awards totaling $1.4 million went out the door in January.

The new data fall short of proving that financial education leads to behavior improvement and smarter decisions as adults, and such proof is sorely needed if schools to are to hop on board with programs like this in a meaningful way. Yet the results clearly point to long-term benefits.

Once a student—no matter what age, including adults—learns that fine print is important and bank fees add up she is likely to be on the lookout the rest of her life. Once a student chooses to keep learning about money management he usually does. Added confidence only helps. Once students develop habits that work well for them and understand pitfalls and mistakes, they are likely to keep searching for what works and what protects them even as the world changes and their finances grow more complex. Slowly, skeptics about individuals’ ability to learn and sort out money issues for themselves are being discredited. But we have a long way to go.

 

MONEY retirement planning

What Women Can Do to Increase their Retirement Confidence

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Izabela Habur—Getty Images

Knowing how much to save and how to invest can help women feel more secure. Here's a cheat sheet.

Half of women report feeling worried about having enough money to last through retirement, according to a new survey from Fidelity Investments of 1,542 women with retirement plans.

Those anxieties aren’t necessarily misplaced either.

Women have longer projected lifespans than men and even if married, are likely to spend at least a portion of their older years alone due to widowhood.

“So they need larger pots of money to ensure they won’t outlive their savings,” says Kathy Murphy, president of personal investing at Fidelity.

Earlier research by the company found that while women save more on average for retirement (socking away an average 8.3% of their salary in 401(k)s vs. 7.9% for men) they typically earn two-thirds of what men do and thus have smaller retirement account balances ($63,700 versus $95,800 for men).

Also, while women are more disciplined long term investors who are less likely than men to time the market, women are also more reluctant to take risk with their portfolios, says Murphy.

“And if you invest too conservatively for your age and your time horizon, that money isn’t working hard enough for you,” she adds.

How Women Can Increase their Confidence

Financial education can help women reduce the confidence gap, and get to the finish line better prepared, says Murphy.

According to the Fidelity survey, some 92% of women say they want to learn more about financial planning. And there’s a lot you can do for free to educate yourself, notes Murphy. As an example, she notes that many employers now offer investing webinars and workshops for 401(k) participants.

You might also start by reading Money’s Ultimate Guide to Retirement for the least you need to know about retirement planning, in digestible chunks of plain English. In particular, you might check out the piece on figuring out the right mix of stocks and bonds, to help you determine if you’re being too risk averse.

Also, simply calculating how much you need to save for the retirement you want—using tools like T. Rowe Price’s Retirement Income Planner—can help you make plans and feel more secure.

The 10-minute exercise can have a powerful payoff: The Employee Benefit Research Institute regularly finds in its annual Retirement Confidence Index that people who even do a quick estimate have a much better handle on how much they need to save and are more confident about their money situation. Also, according to research by Georgetown University econ professor Annamaria Lusardi, who is also academic director of the university’s Global Financial Literacy Excellence Center, people who plan for retirement end up with three times the amount of wealth as non-planners.

Says Murphy, “We need to let women in on the secret that investing isn’t that hard.”

More from Money.com’s Ultimate Guide to Retirement:

MONEY Kids and Money

New Findings About Kids and Money That Your School Can’t Ignore

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Getty Images

For the first time, researchers have directly tied personal finance instruction in high school to better adult behavior. This could change everything.

A required personal finance course in high school leads to higher credit scores and fewer missed payments among young adults, new research shows. These are groundbreaking findings likely to alter educators’ thinking in 50 states.

Until now, researchers have been unable to show consistent evidence that mandatory financial education improved students’ money management skills. With no proof, states have moved slowly on this front—despite encouragement from the president and federal education officials who see financial education as a critical part of the strategy to avoid another financial crisis.

Only 22 states require students to take an economics course, and just 17 require instruction in personal finance, according to the Council for Economic Education’s most recent Survey of the States. While countries like Australia and England have adopted federal mandates for such coursework, the effort in the U.S. is at the state level and has been slow to gain traction.

Critics of financial education have long argued that kids may learn financial concepts but do not retain them long enough to change behavior as adults, and that the power of advertising overwhelms any lessons of frugality learned in high school. Some believe financial education is a waste, and that we are better off using resources to set up third-party point-of-decision counseling.

Now the whole conversation may change. “I hope many people will read this paper and that many more states will adopt financial education in high school,” says Annamaria Lusardi, academic director at the Global Financial Literacy Excellence Center and an economics professor at the George Washington University School of Business.

Looking at students in three states—Georgia, Idaho, and Texas—that recently adopted relatively thorough financial education requirements, researchers tied to the Center for Financial Security at the University of Wisconsin found that young adults 18-22 in those states had higher credit scores and fewer credit delinquencies than students in neighboring states without a financial education requirement.

Interestingly, the first class of students in each state required to take such a course showed little or no improvement in credit score or delinquencies. But each subsequent class made noticeable strides toward smarter money management. This suggests there is a learning curve for teachers and schools, and that they become far more effective with practice.

Specifically, the research showed that three years after high school, students required to take a financial education class had significantly improved credit scores—up 11 points in Georgia, 16 points in Idaho, and 32 points in Texas, outstripping the gains in comparable states. In the third year, all three states also had cut the rate of credit payments at least 90 days late in this age group by 10% in Georgia, 16% in Idaho, and 33% in Texas.

Young adults have been shown to have particularly low levels of financial acumen; they are most prone to expensive credit behaviors like payday loans and paying interest and late fees on credit card balances. This behavior, combined with soaring student debt, often puts them in a financial bind before they earn their first paycheck. A little financial education, the evidence now shows, may go long way.

Read more about kids and money:
4 Costly Money Mistakes You’re Making With Your Kids
3 Money Skills to Teach Your Teen
8 Ways to Teach Your Kids to Be Financially Independent

MONEY 401(k)s

Why Your Employer May Be Your Best Financial Adviser

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Thomas Barwick—Getty Images

Employers are offering more than 401(k) advice. They are adding financial wellness programs that help workers budget, save for a home, and more.

Large employers are taking on the roles of retirement adviser and financial educator in increasing numbers, new research shows. This is welcome news, because the federal government and our schools have not done a great job on this front, and individuals generally have not been able to manage well on their own.

Employers have been tiptoeing into retirement planning for workers for years as part of their 401(k) plan benefits. Typically, the advice has been offered in the form of printed materials and online informational websites. More recently, personalized advice has become available through call-in services and, in some cases, face-to-face meetings with planners arranged through work.

But what started as help with, say, settling on a contribution rate and choosing appropriate investment options has evolved into a more rounded service that may offer lessons in how to budget and save for college or a home. A breathtaking 93% of employers intend to beef up their efforts at helping workers achieve overall financial wellness in a way that goes beyond retirement issues, according to an Aon Hewitt survey.

This effort promises to fill a deep void. Just five states require a stand-alone personal finance course in high school, and just 13 require money management instruction as part of some other class. Meanwhile, the Social Security and pension safety net continues to grow threadbare. Someone has to take charge of our crisis in financial know-how.

Employers don’t relish this role. It comes with lots of questions about fiduciary duty and liabilities related to the advice that is proffered. Yet legal obstacles are slowly being cleared away to encourage more employer involvement, which is coming in part out of self interest. Financially fit workers are more productive and more engaged, research shows.

A company that offers a financial wellness benefit could save $3 for every $1 they spend on their programs, according to a Consumer Financial Protection Bureau report. These programs also reduce absenteeism and worker disability costs. That’s because money problems may cause stress that leads to ill health. So helping employees improve not just their retirement plan but their entire financial picture makes sense.

Among the upgrades most popular with employers, Aon found:

  • 69% offer online investment guidance, up from 56% last year, and 18% of the rest are very likely to add this feature in 2015.
  • 53% offer phone access to financial advisers, up from 35% last year.
  • 49% offer third-party investment advice, up from 44% last year.

Aon also found that 34% of employers have cut their 401(k) plan’s administrative and other costs, compared with just 27% a year ago. This echoes a BrightScope study, which found that employers generally are beefing up investment options while reducing fees in their 401(k) plans. In all, it seems employers are embracing their role as financial big brother—for their own good as well as the good of their workers.

MONEY Kids and Money

3 Ways To Help Your Kids Become Good Gift Givers

Cashew-caramel brownie in baking pan, elevated view
James Baigrie—Getty Images

Children spend a lot of time thinking about what they'll get for the holidays. Use these tips to turn them into givers too.

Ah, the holidays. The season for time-honored traditions like decorating the tree, lighting the menorah, wrapping gifts … and wondering whether you have raised the most selfish kid in the world.

Almost every parent has felt this at one time or another, as toddlers and teens obsess over accumulating more and more holiday stuff. Robin Gorman Newman is no different.

“Like any kid, my son loves to receive,” says Newman, mom to an 11-year-old in Long Island, N.Y, and founder of the organization Motherhood Later for moms over 35.

“They’re all obsessed with getting, especially when they’re younger,” Gorman says. “If you saw my basement, you would know what I’m talking about.”

Which is why Newman embarked on a campaign to shift her son’s mindset from getting to giving. First on the agenda: Baking brownies to bring to the local firehouse, and to families of sick kids staying at the local Ronald McDonald House.

For parents who are trying to encourage giving instead of getting, it can often feel like shouting into the wind, especially at this time of year. American adults are planning to splurge an average of $861 on gifts this holiday season, according to a new survey by American Research Group.

That’s up 8% in a single year, surpassing 2007 numbers for the first time since the recession hit. As a result, little Johnny and Janie can expect to rip the wrapping paper off more boxes over Christmas or Hanukkah.

But don’t despair. There may be hope for turning kids into givers.

According to data from Allowance Manager, a service that helps parents automate allowance payments and track their kids’ spending, many children are setting aside a surprisingly healthy amount for gift-giving.

Roughly 9% of allowances are allocated for gift purchases, a figure that spikes in November and December. And that does not even include charitable donations, which account for an additional 6% of allowance use.

The key question: How do you trigger that mental shift, to get kids thinking of others rather than just themselves?

Have Them Use Some of Their Own Money

Obviously, young children are not going to have a lot of financial resources to tap. But even if it involves very small amounts, have them use some of those resources for gifting.

It drills in the critical personal-finance habit of setting up different buckets for different purposes, one of which should be devoted to others.

“Handling money is best learned through first-hand experience,” says Dan Meader, CEO and co-founder of Rancho Santa Fe, Calif.-based Allowance Manager, which has over 200,000 users. “So we think it’s important that kids get the chance to use some of their own money for gifts, instead of just using their parents’ money.”

Enforce Artificial Limits

Since we’re dealing with modest sums like allowances, you don’t want kids spending everything they have on holidays gifts, or feeling inadequate for not being able to purchase very much.

One elegant solution: Set a hard cap on how much can be spent, advises Ron Lieber, the “Your Money” columnist at the New York Times and author of the upcoming book The Opposite of Spoiled.

“See how may things you can buy for under $20, or figure out the most fun you can create for under $20,” he says. “If you put a cap on it that way, kids can be generous in spirit, without spending every cent they have.”

Set Up a Matching Program

To maximize your kids’ giving, consider what many charities do to supercharge donations: Create a matching program.

If your child saves $5 for family gifts, match it dollar-for-dollar, suggests Lieber. Then take it up a notch: If they save $10, contribute $1.50 for every dollar. If they reach $20, match each dollar with $2 of your own.

“That way it ratchets up, so the more generous they’re willing to be with their own funds, they will have exponentially more impact,” Lieber says.

Encourage Non-Monetary Gifting

There’s no rule that says more spending equals more thoughtfulness, despite what all those TV commercials might suggest. As every parent knows, some of the best gifts don’t come with any price tag at all.

But it may require some creativity. One idea from Lieber: A ‘coupon book’ of handwritten gift certificates that family members can give each other. “A dad might give a coupon to drop whatever he’s doing and play a game, or to ditch work once in the next 12 months and do whatever the kid wants to do,” he says.

“Things like that don’t cost anything, and are often incredibly memorable.”

Indeed, when Robin Gorman Newman looks around her house, her most cherished gift from her son wasn’t bought in a store at all. It’s an acrostic of the word ‘Mommy,’ with each letter standing for its own phrase such as “M is for Making Me Smile.”

“It doesn’t get any better than that,” Newman says. “That’s worth a million bucks right there.”

MONEY retirement planning

Flunking Retirement Readiness, and What to Do About It

red pencil writing "F" failing grade
Thomas J. Peterson—Alamy

Americans don't get the basics of retirement planning. Automating 401(k)s and expanding benefits for lower-income workers may be the best solution.

Imagine boarding a jet and heading for your seat, only to be told you’re needed in the cockpit to fly the plane.

Investing expert William Bernstein argued in a recent interview that what has happened in our workplace retirement system over the past 30 years is analogous. We’ve shifted from defined benefit pension plans managed by professional financial pilots to 401(k) plans controlled by passengers.

Once, employers made the contributions, investment pros handled the investments and the income part was simple: You retired, the checks started arriving and continued until you died. Now, you decide how much to invest, where to invest it and how to draw it down. In other words, you fuel the plane, you pilot the plane and you land it.

It’s no surprise that many of us, especially middle- and lower-income households, crash. The Federal Reserve’s latest Survey of Consumer Finances, released in September, found that ownership of retirement plans has fallen sharply in recent years, and that low-income households have almost no savings.

But even wealthier households seem to be failing retirement flight school.

Eighty percent of Americans with nest eggs of at least $100,000 got an “F” on a test about managing retirement savings put together recently by the American College of Financial Services. The college, which trains financial planners, asked over 1,000 60- to 75-year-olds about topics like safe retirement withdrawal rates, investment and longevity risk.

Seven in 10 had never heard of the “4% rule,” which holds that you can safely withdraw that amount annually in retirement.

Very few understood the risk of investing in bonds. Only 39% knew that a bond’s value falls when interest rates rise—a key risk for bondholders in this ultra-low-rate environment.

“We thought the grades would have been better, because there’s been so much talk about these subjects in the media lately,” said David Littell, who directs a program focused on retirement income at the college. “We wanted to see if any of it is sinking in.”

Many 401(k) plans have added features in recent years that aim to put the plane back on autopilot: automatic enrollment, auto-escalation of contributions and target date funds that adjust your level of risk as retirement approaches.

But none of that seems to be moving the needle much. A survey of 401(k) plan sponsors released last month by Towers Watson, the employee benefit consulting firm, found rising levels of worry about employee retirement readiness. Just 12% of respondents say workers know how much they need for retirement; 20% said their employees are comfortable making investment decisions.

The study calls for redoubled efforts to educate workers, but there’s little evidence that that works. “I hate to be anti-education, but I just don’t think it’s the way to go,” says Alicia Munnell, director of Boston College’s Center for Retirement Research. “You have to get people at just the right time when they want to pay attention—just sending education out there doesn’t produce any change at all.”

What’s more, calls for greater financial literacy efforts carry a subtle blame-the-victim message that I consider dead wrong. People shouldn’t have to learn concepts like safe withdrawal rates or the interaction of interest rates and bond prices to retire with security.

Just as important, many middle- and lower-income households don’t earn enough to accumulate meaningful savings. “We’ve had stagnant wage growth for a long time—a lot of people can’t save and cover their living expenses,” says Munnell, co-author of “Falling Short: The Coming Retirement Crisis and What to Do About It” (Oxford University Press, December 2014).

Since the defined contribution system is here to stay, she says, we should focus on improving it. “We have to auto-enroll everyone, and auto-escalate their contributions. Otherwise, we’re doing more harm than good.”

Munnell acknowledges that a better 401(k) system mainly benefits upper-income households with the capacity to save. For everyone else, it’s important that no cuts be made to Social Security. And she says proposals to expand benefits at the lower end of the income distribution make sense.

“Given all the difficulty we’re having expanding coverage with employer-sponsored plans, that is the most efficient way to provide income to lower-paid workers.”

Read next: The Big Flaws in Your 401(k) and How to Fix Them

MONEY Kids and Money

Trouble Talking to Kids About Money? Try This Book Instead

parents trying to talk to teenage daughter
Getty Images/Altrendo

A new book hopes to impart important money lessons in just a few words and pictures

Talking to your kids about money is never easy. We have so many financial taboos and insecurities that many parents would rather skip it—just like their parents likely did with them. If that sounds like you, maybe a new easy-to-digest money guide written for teens can be part of your answer.

As a parent, you have to do something. Kids today will come of age and ultimately retire in a vastly less secure financial world. Their keys to long-term success will have little to do with the traditional pensions and Social Security benefits that may be a big part of your own retirement calculus. For them, saving early and building their own safety net is the only sure solution.

Most parents get that. After all, adults have seen first-hand the long-running switch from defined benefit to defined contribution plans that took flight in the 1980s. Yet only in the last 15 years have we really begun to grasp how much this change has undermined retirement security. Now, more parents are having the money talk with their kids. Still, many say they find it easier to talk about sex or drugs than finances.

The big challenge of our day, as it relates to the financial security of young people, is getting them thinking about their financial future now while they have 40 or 50 years to let their savings compound. But saving is only one piece of the puzzle. Young people need to protect their identity and their credit score—two relatively recent considerations. Many of them are also committed to making a difference through giving, which is an uplifting trait of younger generations. Yet they are prone to scams and don’t know how to vet a charity.

In OMG: The Official Money Guide for Teenagers, authors Susan and Michael Beacham tackle these and other basics in a breezy, colorful, cleverly illustrated booklet meant to hold a teen’s attention. The whole thing can be read in an hour. I’m not convinced the YouTube generation will latch on to any written material on this subject. And while the authors do a nice job of keeping things simple, they just can’t avoid eye-glazing terms like “liquidity” and “principal.”

But they make a solid effort to hold a teen’s interest through a handful of “awkward money moments,” which illustrate how poor money management can lead to embarrassing outcomes like their debit card being declined in front of friends or having to wear last year’s team uniform because they spent all their money at the mall. “Kids are very social and money is a big part of that social experience,” says Susan Beacham. “No teen wants to feel awkward, which is why we chose this word. If they read nothing else but these segments they will be ahead of the game.”

The Beachams are co-founders of Money Savvy Generation, a youth financial education website. They have a long history in personal finance and created the Money Savvy Pig, a bank with separate compartments for saving, spending, donating, and investing. In OMG, they tackle budgets, saving, investing, plastic, identity theft, giving, and insurance.

A new money guide for young people seems to pop up every few years. So it’s not like this hasn’t been tried before. Earlier titles include Money Sense for Kids from Barron’s and The Everything Kids Money Book by Brette McWhorter Sember. But most often this subject is geared at parents, offering ways to teach their kids about money. Dave Ramsey’s Smart Money Smart Kids came out last spring and due out early next year is The Opposite of Spoiled: Raising Kids Who are Grounded, Generous and Smart About Money from New York Times personal finance columnist Ron Lieber.

In a nod to how tough it can be to get teens to read a book about money, Beacham suggests a parent or grandparent ask them to read OMG, and offer them an incentive like a gift card after completing the chapter on “ways to pay” or a cash bonus after reading the chapter on budgets and setting one up. “Make reading the book a bit like a treasure hunt,” she says. That just might make having the money talk easier too.

 

 

 

MONEY 401(k)s

Are You Smart Enough to Boost Your 401(k)’s Return? Take This Simple Quiz

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Pete Ark/Getty Images

If you can answer these 5 basic questions, you'll likely earn bigger gains in your retirement plan.

Can knowing more about investing and finances boost your 401(k)’s returns? A recent study suggests that may be the case. But you don’t have to be a savant to improve performance. Even if you don’t know a qualified dividend from a capital gain, lessons from this research can help you fatten your investment accounts.

The more you know about finances and investing, the higher the returns you’re likely to earn in your 401(k). That, at least, is the conclusion researchers came to after giving thousands of participants of a large 401(k) plan a five-question test to gauge how much they know about basic financial concepts and then comparing the results with investment performance over 10 years.

You’ll get your turn to answer those questions in a minute. But first, let’s take a look at what the study found.

Savvier Investors Hold More Stocks

Basically, the 401(k) participants who answered more questions correctly earned substantially higher returns in their 401(k). And I mean substantially. Those who got four or five of the five questions right had annualized risk-adjusted returns of 9.5% on average compared with 8.2% for those who answered only one or none of the questions correctly. That 1.3-percent-a-year margin, the researchers note, would translate to a 25% larger nest egg over the course of a 25-year career. That could be the difference between scraping by in retirement versus living a secure and comfortable lifestyle.

But while the 401(k)s of participants with greater knowledge didn’t outperform the accounts of their less knowledgeable peers because of some arcane or sophisticated investing strategy. The secret of their success was actually pretty simple (and easily duplicated): They invested more of their savings in stock funds than their financially challenged counterparts. And even when less-informed participants did venture into stocks, they were less apt to invest in international stocks, small-cap funds and, most important to my mind, less likely to own index funds, the option that has the potential to lower investment costs and dramatically boost the value of your nest egg.

The better-informed investors’ results come with a caveat. Even though more financially savvy participants earned higher returns after accounting for risk, their portfolios tended to be somewhat somewhat more volatile (which isn’t surprising given the higher stock stake). So they had to be willing to endure a somewhat bumpier ride en route to their loftier returns.

I’d also add that while more exposure to stocks does generally equate to higher long-term returns, no one should take that as an invitation to just load up on equities. When investing your retirement savings, you’ve also got to take your risk tolerance into account as well as the effect larger stock holdings have when the market heads south. That’s especially true if you’re nearing retirement or already retired, as portfolio heavily invested in stocks could suffer a setback large enough to force you to seriously scale back or even abandon your retirement plans.

Mastering the Basics

Ready to see how you’ll fare on the study’s Financial Knowledge test? The five questions and correct answers are below, followed by my take on the lessons you should from this exercise, regardless of how you score.

Question #1. Suppose you had $100 in a savings account that paid 2% interest per year. After five years, how much would you have in the account if you left the money to grow?
a. More than $110
b. Exactly $110
c. Less than $110

Question #2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account?
a. More than today
b. Exactly the same
c. Less than today

Question #3. Is this statement true or false? Buying a single company’s stock usually provides a safer return than a stock mutual fund.
a. True
b. False

Question #4. Assume you were in the 25% tax bracket (you pay $0.25 in tax for each dollar earned) and you contributed $100 pretax to an employer’s 401(k) plan. Your take-home pay (what’s in your paycheck after all taxes and other payments are taken out) will then:
a. Decline by $100
b. Decline by $75
c. Decline by $50
d. Remain the same

Question #5. Assume that an employer matched employee contributions dollar for dollar. If the employee contributed $100 to the 401(k) plan, his account balance in the plan including his contribution would:
a. Increase by $50
b. Increase by $100
c. Increase by $200
d. Remain the same

The answers:

1. a, More than $110. This question was designed to test people’s ability to do a simple interest calculation. To answer “more than” instead of “exactly” $100, you also had to understand the concept of compound interest. (Percentage of people who answered this question correctly: 76%.)

2. c, Less than today. This question gets at the relationship between investment returns and inflation and the concept of “real” return. To answer it correctly, you must understand that if your money grows at less than the inflation rate, its purchasing power declines. (92%)

3. b, False. Here, the idea was to test whether people understood that a stock mutual fund contains many stocks and that investing in a large group of stocks is generally less risky than putting all one’s money into a the stock of a single company. (88%)

4. b, Decline by $75. This question gauges people’s understanding of the tax benefit of a pretax contribution to a 401(k) and its effect on the paycheck of someone in the 25% tax bracket. (45%)

5. c, Increase by $200. This was simply a test of whether people understood the concept of matching funds and the effect of a dollar-for-dollar match. (78%)

Average score: 3.8 All 5 correct: 33% All 5 wrong: 2%

Okay, so now you know how you stack up compared with the 401(k) participants in the study. But whether you did well or not, remember that your performance on this or any other test isn’t necessarily a prediction of how your retirement portfolio will fare. Very financially astute people sometimes make dumb investment moves. Sometimes they try to get too fancy (think of the Nobel Laureates whose hedge fund lost billions in the late ’90s). Other times there may be a disconnect between what people know intellectually and how they react emotionally.

Nor does a lack of financial smarts inevitably doom you to subpar performance. You don’t need a PhD in finance to understand the few basic concepts that lead to financial success: spreading your money among a variety of investments instead of going all-in on one or two things, keeping costs down and paying attention to both risk and return when investing your savings.

So by all means take the time to educate yourself about investing. But don’t feel you have to go beyond a few simple but effective investing techniques to earn competitive returns and improve your chances of a secure retirement.

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Why Americans Can’t Answer the Most Basic Retirement Question

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marvinh—Getty Images/Vetta

Workers are confused by the unknowns of retirement planning. No wonder so few are trying to do it.

Planning for retirement is the most difficult part of managing your money—and it’s getting tougher, new research shows. The findings come even as rising markets have buoyed retirement savings accounts, and vast resources have been poured into things like financial education and simplified investment choices meant to ease the planning process.

Some 64% of households at least five years from retirement are having difficulty with retirement planning, according to a study from Hearts and Wallets, a financial research firm. That’s up from 54% of households two years ago and 50% in 2010. Americans rate retirement planning as the most difficult of 24 financial tasks presented in the study.

How can this be? Jobs and wages have been slowly improving. Stocks have doubled from their lows, even after the recent market tumble. The housing market is rebounding. Online tools and instruction through 401(k) plans have greatly improved. We have one-decision target-date mutual funds that make asset allocation a breeze. Yet retirement planning is perceived as more difficult.

The explanation lies at least partly in an increasingly evident quandary: few of us know exactly when we will retire and none of us know when we will die. But retirement planning is built around choosing some kind of reasonable estimate for those two variables. But that’s something few people are prepared to do. As the study found, 61% of households between the ages of 21 to 64 say they can’t answer the following basic retirement question: When will I stop full-time work?

Even the more straightforward retirement planning issues are challenging for many workers. Among the top sources of difficulty: estimating required minimum distributions from retirement accounts (57%), deciding where to keep their money (54%), and getting started saving (51%).

Those near or already in retirement have considerably less financial angst, the study found. Their most difficult task, cited by 33%, is estimating appropriate levels of spending, followed by choosing the right health insurance (31%) and a sustainable drawdown rate on their savings accounts (28%).

For younger generations, planning a precise retirement date has become far more difficult, in part because of the Great Recession. Undersaved Baby Boomers have been forced to work longer, and that has contributed to stalled careers among younger generations. The final date is now a moving target that depends on one’s health, the markets, how much you can save, and whether you will be downsized out of a job. Americans have moved a long way from the traditional goal of retirement at age 65, and the uncertainty can be crippling.

Nowhere does the study mention the difficulty of estimating how long we will live. Maybe the subject is simply one we don’t like to think about, but the fact is, many Americans are living longer and are at greater risk of running out of money in retirement. This is another critical input that individuals have trouble accounting for.

In the days of traditional pensions, many Americans could rely on professional money managers to grapple with these problems. Left on their own, without a reliable source of lifetime income (other than Social Security), workers don’t know where to start. The best response is to save as much as you can, work as long you can—and remember that retirees tend to be happy, however much they have saved.

Related:

How should I start saving for retirement?

How much of my income should I save for retirement?

Can I afford to retire?

Read next: 3 Little Mistakes That Can Sink Your Retirement

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