Data & Research April 5, 2017

Americans Lack Knowledge in Financial Literacy

A survey found that 38% of Americans know nothing about compounding.
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In starting off Financial Literacy Month, Stash, a digital investment advisor company, has released findings revealing common misunderstandings many Americans have on investing and finance.

Their first annual financial literacy survey, points out errors exemplifying the lack of knowledge that many have regarding financial literacy. The survey found, among other findings, that 40% of respondents have little knowledge about inflation, 38% have no familiarity with compounding, and 16% cannot make a decision whether they would choose a higher or lower interest rate on their mortgage.

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While Americans may realize the significance in retirement saving and focusing on the years ahead, Brandon Krieg, CEO and co-founder of Stash, notes the lack of knowledge that follows this recognition.

“As the survey shows, financial literacy is a problem in America – not one confined to a specific age or gender,” he says. “Our findings demonstrate the need to help all Americans establish a strong base of financial literacy to help them create smarter financial habits.”

Even though Americans, in general, continue to struggle with saving for retirement, the survey highlights several groups that can benefit from better knowledge: Millennials, women and beginner investors.

Data found shows that while 61.4% of Millennials are investing for retirement, only 48% of respondents are currently contributing to a 401(k), while 61% employ a traditional savings account.

Krieg suggests Millennials should begin utilizing and understanding the advantages of compounding investments.

“For Millennials to really make their money work for them, they need to utilize more savings and investment tools that capitalize on compounding,” he says. “This is an area where the lack of financial literacy is really detrimental to achieving long-term money goals.”

Although Millennials are investing for marriage, retirement and other future objectives, the survey found this age group also stores away for shorter-term goals—including vacations—more than any other generation, at 32.9% compared to Generation Xers (23.2%) and Baby Boomers (16.2%).

Surprisingly, Millennials came in first with investing for health care, at 8.9%, while Gen Xers came in second (6.7%); and Boomers at 7.3%.

Regarding women, survey results saw 47% of female respondents are investing somewhere in the middle between $1 to $500 a year, whereas only 36% of men are doing so. However, when it comes to investing more money, Stash reported that 37% of males are investing over $1,000 each year, while only 22% of women are saving larger sums.

Moreover, according to the survey, 50% of men and 49% of women save using 401(k) plans, but males are “twice as likely to use taxable investment accounts than women,” at 15% of men and 9% of women.

For beginner investors, findings demonstrated the importance in gaining investment experience, including knowledge in 401(k)s, 529 Plans; and Traditional Roth/IRAs, among other investment products. Adding to the large gap in investment knowledge between advanced and beginner investors, experienced investors are also “more than twice as likely to save using an IRA, and four times more likely to use a taxable investment account,” according to the survey. 

When it came to 401(k)s, only 50.9% of beginner investors said they used the tool to save, while 65.9% of advanced investors reported utilizing it. Additionally, 11.8% of beginner investors are not saving at all for the future, while only 6.5% of advanced investor respondents are not putting any money away.

More survey findings can be found here. 

Data & Research April 5, 2017

HSA Use Growing

Although more people are enrolling HSAs today, misconceptions still hold back many from making the most out of these accounts.

 

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In the midst of higher health care costs, Fidelity Investments finds that Health Savings Accounts (HSA)s are becoming more popular. The firm’s 2016 year-end report of its own HSA business may reflect some new trends in the wider HSA industry.

According to the study, adoption of HSAs increased by 21% in 2016, up four percentage points from 2015. Total HSA assets climbed 47% to reach $2 billion. Fidelity finds the average account holders are younger individuals with higher incomes. The average account balance was $3,520 and the average contribution was $3,019.

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However, although 70% of employees said they understand how their HSAs worked, several still had misconceptions about HSAs, and many lacked awareness of their HSA benefits. Fidelity found that 40% believe they lose unspent HSA funds each year; 43% don’t know HSA funds have a triple-tax benefit; and 53% are not aware of the non-medical withdrawal provision available to those ages 65 or older. Furthermore, Fidelity notes that Americans continue to underestimate how much they would spend out-of-pocket on health care in retirement. Forty-four percent of employees said they believe they will spend less than $50,000. Fidelity estimates that a couple retiring at age 65 today would spend about $260,000.

Additionally, 46% of employees don’t know HSA funds can be invested in mutual funds.

In fact, only 6.1% of accounts are invested, amounting for 21.1% of total assets. However, the average asset balance for invested account holders is $16,000. Moreover, the research suggests several account holders are willing to learn about the benefits of HSAs. In 2016, 26.8% of account holders called for assistance and about 40% took action – a higher rate than what the firm reported for its defined contribution (DC) business.

The research also indicates that savers with HSAs aren’t necessarily falling back on saving for retirement through tax-advantaged plans. The report notes that those contributing to HSAs have an average of $119,000 more in DC savings than those that don’t. The firm also notes that HSA account holders with a DC employer match contributed $1,054 more to their HSA than those with no DC employer match, “implying that a DC employer match enables the person to redirect money to their HSA.” 

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