Can You Pass This Financial Literacy Test?
by SGL Financial
Our 2 Cents – Episode #218
Can You Pass This Financial Literacy Test?
Our 2 Cents is back with an eye-opening episode diving into retirement readiness and target-date funds. Tune in to test your retirement income knowledge and gain some valuable insights along the way. Listen in now using the link below!
- Retirement Financial Literacy Quiz:
- Most Americans struggled to answer these 6 basic retirement planning questions. How do you think you’ll score?
- Target-Date Funds:
- Should you invest in a target-date fund? We’re breaking down the pros, cons, and whether it’s the best move for your retirement plan.
Request Your Free Consultation Today
847.499.3330
Podcast Transcript
Announcer: You’re listening to Our 2 Cents, with the team from SGL Financial, Building Wealth for Life. Steve Lewit is the President of SGL Financial, and Gabriel Lewit is the CEO. They’re here to discuss all the latest in financial news, trends, strategies, and more.
Gabriel Lewit: Well, hello everybody. Welcome back to Our 2 Cents. We are excited and ecstatic to have you back here today with us. I’ve got the gloriously amazing Steven Lewit here with me.
Steve Lewit: I have an admission to make.
Gabriel Lewit: Which is?
Steve Lewit: I left my butter out overnight.
Gabriel Lewit: Your butter at home? Yes, last episode we were talking about do you keep condiments like butter out overnight? So, you did.
Steve Lewit: Couldn’t resist. I’ll tell you something-
Gabriel Lewit: It does spread better.
Steve Lewit: It’s so easy to spread it, instead of chopping through the frozen butter.
Gabriel Lewit: Yeah, you’re getting your chainsaw out to get your butter stick ready?
Steve Lewit: Yeah, I haven’t done that in years. I thought it would be green in the morning.
Gabriel Lewit: Yeah, no, no. It takes a little while for it to turn green. Actually, I’m not sure. Does butter ever mold? I don’t know. We got off-topic already.
Steve Lewit: Yeah, it does something. I’m sorry, I just had to report that because what you put in your refrigerator is top of the mind for most people that tune in to this podcast.
Gabriel Lewit: Yes. Well, and I just found out butter can mold. Producer Gabby pulled it up on the screen, so now you know. News to use.
Steve Lewit: All right, back to the work at hand.
Gabriel Lewit: Back to money, back to finance, back to your financial health. We’ve got a financial literacy quiz here for you today, folks. Get ready. Get your pencils out, get your erasers ready, get your stopwatches set.
Steve Lewit: Yeah, turn off your computer.
Gabriel Lewit: It’s quiz time, okay?
Steve Lewit: Yeah, you can’t look it up.
Gabriel Lewit: Now, we do do these from time to time, I find them to be quite a bit of fun. And now, what prompted this? Okay, there was an article that we saw that has a financial literacy quiz, and is actually an entire report based around this. We’re going to talk about this and the results of this in a second. And of course, it’s titled Americans Flunk the Retirement Literacy Quiz.
Steve Lewit: Yeah. So, there’s no pressure on you folks not to flunk.
Gabriel Lewit: Yeah. So, the report is titled here, Financial Literacy and Retirement Fluency in America. And there is a six question quiz as part of this report, and most people that they gave it to flunked it. Now, we’re going to give the quiz to you, and you’re going to get a couple seconds on the fly to think about what your answer is. The good news is there’s no official scoring, so if you said that you got it right no one will know otherwise.
Steve Lewit: It’s between you, yourself, and yourself.
Gabriel Lewit: Correct. But we’re going to walk through these quiz question by quiz question here and see how you do. Now, Steve, I’m assuming you’re going to know the answer to all these.
Steve Lewit: Well, I did read them and some of them are a little, I mean, they’re pretty basic, but yet I can see why people would get them incorrect.
Gabriel Lewit: Yeah. Okay, so let’s take a look here. So, these are six very basic questions used to gauge basic retirement fluency, each one covering a distinct subject, social security benefits, Medicare coverage of healthcare expenses, employment-based retirement savings, ensuring lifetime income, the likelihood of needing long-term care at older ages and life expectancy in retirement. So, one question for each. All right?
Steve Lewit: Okay.
Gabriel Lewit: And yes, it’s designed to be pretty simple. And that was the goal, can people answer a simple literacy quiz?
Steve Lewit: Why are my palms sweating? I’m so nervous.
Gabriel Lewit: Can you stay on point here?
Steve Lewit: Okay.
Gabriel Lewit: You’re going to pass, I’m very confident.
Steve Lewit: All right.
Gabriel Lewit: Okay. So, let’s jump right in, guys. Get your pencils ready. So question number one, which statement about social security is false?
Steve Lewit: False.
Gabriel Lewit: Okay, the first statement is the amount someone receives in social security benefits depends upon his or her earnings during the last two years of full-time employment. A worker receives social security benefit payments if he or she becomes disabled about retiring, that’s option two.
Steve Lewit: Before retiring. Yep.
Gabriel Lewit: Option three says social security benefit payments will continue as long as an individual is alive no matter how long he or she lives. And option four is, don’t know.
Steve Lewit: Wow.
Gabriel Lewit: Okay, so which of those is false?
Steve Lewit: Which of these is false. Well, so I need to answer that now.
Gabriel Lewit: Well, I’m giving our listeners some time to pause.
Steve Lewit: Okay, I think it’s number one.
Gabriel Lewit: It is number one. Well, you don’t think that, you know that.
Steve Lewit: I do know that because it’s based on 35.
Gabriel Lewit: Just making sure you just think that you know that.
Steve Lewit: Well, I’m trying to be humble.
Gabriel Lewit: Yes. If you selected statement number one, the amount someone receives in social security benefits depends upon his or her earnings during the last two years of full-time employment, you would be correct. That is a false statement. It is based on 35 years of highest earnings history. In fact, if you go online and get your social security report at ssa.gov, you’ll see your histories in there, for your earnings history-
Steve Lewit: Of all your earnings. Yep, exactly.
Gabriel Lewit: … and it’ll explain this a little bit more in detail for you as well. Okay. Well, maybe you found that one easy, maybe not. Let’s see how you do on question number two.
Steve Lewit: Medicare.
Gabriel Lewit: Okay, Medicare. On average, Medicare and other government programs cover how much of an individual’s healthcare expenses in retirement? Option one, over 90%. Option two, about two-thirds. Option three, about one-half. And option four is I don’t know.
Steve Lewit: I’ve got this aced. I was just reading research on this.
Gabriel Lewit: Well, what is the correct answer, Mr. Steve?
Steve Lewit: The correct answer is about two-thirds. Number two.
Gabriel Lewit: Correct, it is about two-thirds. Now, this is really interesting. I just a review with a relatively new younger client of mine, about 40. And this was a couple weeks ago and we were building out her plan and we got her cash flow, and we project all the way out to Medicare age. And I said, “And by the way, of course, when you get to Medicare you’re going to have to pay about 5, 6,000 a year in the future for inflation to cover your Medicare part A and part B, and supplements, and plan D drug plans.” And she looks at me, she’s like, “What do you mean?”
Steve Lewit: “What are you talking about?”
Gabriel Lewit: “I mean, well you’ve got to pay for those.” And she’s like, “They’re not included? Just social security, like it’s just covered for you. I thought they were all included.”
Steve Lewit: Yeah, it’s free. Yeah.
Gabriel Lewit: And she was really surprised to learn, and this is a true story, she was really surprised to learn that it wasn’t just all covered in retirement.
Steve Lewit: Well, most people don’t know what a part B or a part D is. All they know is they get Medicare.
Gabriel Lewit: Yeah. So yeah, so many people selected over 90% thinking that everything’s pretty much covered for you, but it is about two thirds of your healthcare expenses and retirement would be covered.
Steve Lewit: That is correct.
Gabriel Lewit: Okay. Well, how did you do so far, folks? Hopefully you are two for two.
Steve Lewit: I’m doing great.
Gabriel Lewit: So, so smart. So, so smart.
Steve Lewit: And humble. The humility is driving everybody nuts.
Gabriel Lewit: Let’s talk about workplace retirement plans.
Steve Lewit: Workplace retirement.
Gabriel Lewit: Okay, question from the quiz here says, “Letitia plans to start saving for retirement by setting aside $2,000 this year. Her employer offers a 401(k) plan and fully matches a worker’s contributions up to 5,000 each year. Under what scenario below does Letitia have the largest amount in retirement savings at year-end?”
Steve Lewit: So, if I contribute 5,000, I get 2,000.
Gabriel Lewit: No. So, she sets aside $2,000, Letitia.
Steve Lewit: Right, okay.
Gabriel Lewit: Her employer will offer a match up to $5,000 each year.
Steve Lewit: Okay.
Gabriel Lewit: Okay? So, option A says, “Latisha contributes 2,000 to the 401(k) plan and invests the money in a mutual fund earning 5% during the year. She contributes 2,000 to an IRA, individual retirement account, and invests the money in a mutual fund that earns 5% during the year.”
Steve Lewit: So, she’ll get a match and invest the other money. She’ll get a match, right? I’m sorry.
Gabriel Lewit: On the first one, 401(k), it doesn’t say that. This is why you’re confusing the … You’re skewing the answers now.
Steve Lewit: I’m thinking out loud. I’ll be quiet.
Gabriel Lewit: Thank you.
Steve Lewit: All right, you’re welcome.
Gabriel Lewit: So, option one is she contributes two grand to the 401(k) plan. Option two is she contributes 2,000 to an individual retirement account. Both earn the same 5%, both is her contributing 2,000. Option three says it does not matter, she will have the same amount of year-end savings either way, and option four says don’t know.
Steve Lewit: Oh. So, if she does the IRA she doesn’t get the match.
Gabriel Lewit: Correct.
Steve Lewit: And if you say it doesn’t matter, that means the extra money you would get in the match doesn’t matter, which is not true.
Gabriel Lewit: Correct.
Steve Lewit: Don’t know could be true. But if you logically think it through, it’s got to be number one.
Gabriel Lewit: Don’t know could always be true.
Steve Lewit: Yeah, that’s correct.
Gabriel Lewit: The question is, which one has the largest amount of money in retirement savings?
Steve Lewit: Oh, she contributes the 2,000. She gets a 2,000 match, invests it in mutual funds and gets 5%. She’s way ahead because she’s got 4,000 invested, and-
Gabriel Lewit: Yes. The correct answer is one where she contributes $2,000 to the 401(k). Because, as it says in the overview, she would get a match in the 401(k).
Steve Lewit: Did you hear that logic? Just singing out loud.
Gabriel Lewit: So, if you’ve ever talked to us or if you just follow this kind of stuff, generally anytime you get free match money it’s a 100% return on the year for that money.
Steve Lewit: Instantly.
Gabriel Lewit: Instead of earning $100 in interest on the year on the IRA, you just earned $2,000 plus 5%. You earned quite a bit more because of that match amount.
Steve Lewit: Always, always, always take the match.
Gabriel Lewit: Correct. Okay. Well folks, hopefully you’re three for three, let’s get to the last three here. Susan worries about living a long life and running out of money. What is the best way for her to address that possibility? The options are one, buy an annuity. Two, buy life insurance. Three, there is nothing she can do about this. And four is I don’t know.
Steve Lewit: Well, I know the answer to this. I’m surprised, I would think most people got this one right.
Gabriel Lewit: We’re going to get to the results at the end.
Steve Lewit: Yeah, well you buy an annuity.
Gabriel Lewit: That is correct.
Steve Lewit: That’s what the definition of an annuity is, it’s lifetime-
Gabriel Lewit: Well, you know this as a financial advisor.
Steve Lewit: Right. So, lifetime income payments guaranteed.
Gabriel Lewit: If you’re talking to, let’s say a kid graduates high school and goes to work at the construction company and working on the roads, I’m just thinking because of all the road construction around here and I see a lot of young kids out there.
Steve Lewit: They might ask by-
Gabriel Lewit: Do you think they know what an annuity is?
Steve Lewit: No.
Gabriel Lewit: Probably have no clue what it is, right?
Steve Lewit: They would either say three or four.
Gabriel Lewit: Yeah, maybe they don’t know, maybe they say life insurance somehow … But a lot of people got this question wrong. But the correct answer is an annuity, an annuity gives you a guaranteed stream of income payments for lifetime. Thus, if you’re worried about longevity insurance, you could never run out of money with the annuity. It would pay you for forever.
Steve Lewit: Yeah. I’m thinking why people would not get it right, but all right, I’m here. I’m here, I’m just trying to understand. These are so basic and-
Gabriel Lewit: To you.
Steve Lewit: To me, and we don’t teach this stuff.
Gabriel Lewit: It is not taught. That’s going to be one of the studies of the results of the study on financial literacy. But let’s move on, question number five. What is the likelihood that a 65-year-old will eventually need some type of long-term care insurance or services? Sorry, not insurance, services.
Steve Lewit: Services, yeah.
Gabriel Lewit: Okay. Option one, about 30%, 3 out of 10. Option two, about 50%, 5 in 10. And option three, about 70%, 7, 10, or don’t know.
Steve Lewit: Yeah, I know. Should I say it already?
Gabriel Lewit: You do understand that everybody listening to the show knows that you know this, right? I mean, number one, you have the answers in front of you, and B, you know it because you do this for a living. That’s not the point of the quiz. Just giving you a hard time, Mr. Lewit. Folks out there listening, what did you guess? Okay, the answer for you is, Mr. Steve.
Steve Lewit: Number three.
Gabriel Lewit: It is, 70% of people, a 65-years-old or older will eventually need some type of long-term care services.
Steve Lewit: That’s correct.
Gabriel Lewit: Okay. And long-term care services, maybe people didn’t know what that means. It means you can’t perform two out of six, what are called ADLs, activities of daily living, eating, bathing, showering, mobility, moving, things like that. Those are called ADLs. And if you can’t do those, you will need help to survive the day, which is what are called long-term care services.
Steve Lewit: Either at home or in a licensed facility.
Gabriel Lewit: Correct, yeah. So, 7 in 10 people will need some form or type of long-term care services for some period of time. Okay, last question folks, and then we’ll see how you did. On average in the U.S., how long will a 65-year-old man slash woman live? Okay, how long will a 65-year-old man or woman live? Option one, about 14 more years, age 79, and for women, about 17 more years, age 82. Option two says men will live to 19 more years, age 84, and women to 87, 22 more years. Or option three says men will live to 89, about 24 more years, and women will live to about 92, about 27 more years. Option four of course saying I don’t know.
Steve Lewit: Yeah. So, the answer is number two.
Gabriel Lewit: The answer is number two.
Steve Lewit: The answer is number two, for sure. And what’s interesting about this is that more and more people however, are living to number three, to age 89 and age 92. That is actually the faster growing portion of the age ranges, but it hasn’t changed the average yet.
Gabriel Lewit: Well, because percentage-wise it’s a very small percentage-
Steve Lewit: It’s a small percentage, yeah.
Gabriel Lewit: … of people still living to that-
Steve Lewit: Yeah, that’s why it hasn’t affected the average.
Gabriel Lewit: Yes. But yes, collectively here the answer, folks, is men will live, if they retire at 65, about 19 more years, average life expectancy 84, women, about 22 more years, average life expectancy age 87. So, in our planned projections, we typically by default run them out to age 85. However, many times we will run those out to 90 for that very specific reason. All right. So folks, how did you do? Did you get one out of six, two out of six, four out of six? Or did you ace them all? We’d love to hear the answers to that if you felt so inclined, email us how you did info at sglfinancial.clom. Dot clom. Dot com.
Steve Lewit: It’s a new network. We’re using the clom network.
Gabriel Lewit: We will respond back to you; we love to reply and say hello to anybody that writes in to us. Yeah, tell us how you did. Okay, love to hear that. Now, we’ll tell you how the rest of the world did here-
Steve Lewit: Yeah, and if you would like the questions to give your spouse or your kids, just give us a ring and we’ll also provide those to you.
Gabriel Lewit: Indeed, yeah. So okay, let’s look at the results here. Well, basically most people, as we explained earlier, flunked this quiz. Only 7% of all the people surveyed were able to correctly answer five or more, five or six of these questions correctly. Only 7% answered even five of these correctly.
Steve Lewit: That’s amazing. Yeah.
Gabriel Lewit: Very interesting. Now, on the other end of the spectrum, 34% answered only one or fewer questions correctly.
Steve Lewit: So, one-third of people taking this exam got one or less questions correct.
Gabriel Lewit: That’s correct.
Steve Lewit: Had no idea about the other ones.
Gabriel Lewit: Got pretty much everything wrong.
Steve Lewit: Wow. Wow, that’s sad actually. I mean, if you can’t function around money, money is such an integral part of our lives, and to not understand it, and how it works, and where it comes from, and how you can grow it and create wealth, it’s such a hurdle to get over because even if you understand it, it’s still pretty tough to negotiate through the world.
Gabriel Lewit: Yeah, and the recap of this said on average, if you’re averaging out all the responses, two out of six questions were answered correctly when you average everything together. And unfortunately this is an indictment here on I think the education system, because-
Steve Lewit: Absolutely.
Gabriel Lewit: … this isn’t taught in high school, it’s not taught in college, it should be required, I’ve said this before, required exit training upon leaving college, in my two cents. And jobs don’t really teach this. In fact, we’re going to talk about this in a second, the financial world, it was intended to be a good thing is trying to put retirement on autopilot. In other words, there’s regulations now that when you start a new job you auto contribute to a 401(k), and then it’ll auto put some of your money in a target date fund. It’s try to make this stuff really just automated because people don’t know about it, but what that also does is then they don’t provide nearly as much education. Well, why do we have to provide education? This is just going to do this for people…
Steve Lewit: Well, it makes people lazy. It makes them lazy.
Gabriel Lewit: Lazier, yeah.
Steve Lewit: It says, “Look, I don’t have to do anything. They’ve got it all figured out for me. I don’t understand it, but what the heck?”
Gabriel Lewit: Yeah. Only 28 states have some semblance of financial literacy requirements for high school students. Now, do you think teaching high school students about Medicare is the right time to teach them? Do you think that’s what’s top of mind for them as they head off to college?
Steve Lewit: I think that’s the class they sleep through.
Gabriel Lewit: I think it should be an exit class in college. Obviously not every high schooler though goes to college, so they do need to teach it there as well. But it’s hard because 18 year olds are probably not … “What do I care about retirement? I’m 18.” So, it’s tricky. What’s the solution to all this? It’s really hard. Really hard. Anyways, you look at some of these questions, and depending on which ones people got wrong, if they got the life expectancy one wrong that’s not so bad. But if they’re missing the concept of the free match in the 401(k), if they don’t understand that Medicare doesn’t pay for everything they may not save enough, if they don’t understand how money impacts longevity, just a lot of things here can really go bad. I would’ve loved to have seen a question on investing such as how much could the stock market lose your money if we had a bad bear market? I bet people would’ve answered like, “Oh, it could only go down 10, 20%,” not understanding they could lose 50% of their money.
Steve Lewit: Or do they know what a bear market is?
Gabriel Lewit: Or a question, if I’m 30 years old should I be investing in bonds? And people would probably be like, “Sure, bonds are great-”
Steve Lewit: “Sure, I love bonds.”
Gabriel Lewit: … even though long-term they’re terrible for your retirement if you’re 30 years old, because they just leave so much money on the table. So yeah, so much that people could get wrong. I would turn this into a 10 part quiz and I bet you people would fail even more.
Steve Lewit: But in their failing they might learn something.
Gabriel Lewit: They might.
Steve Lewit: That’s the whole point.
Gabriel Lewit: Yep.
Steve Lewit: Yep.
Gabriel Lewit: So, that’s the quiz for you, folks. If you’ve got any questions, please let us know here. Again, let us know how you did, our email here info at sglfinancial.com.
Steve Lewit: I did good.
Gabriel Lewit: You can call us at 847-499-3330. If you want our help with creating a retirement plan or have questions for us, again, complimentary phone call, introduction call. Obviously you’re a current client of ours, call us anytime for any reason, but we would love to speak with you and see how we might best be able to help map out your secure retirement future. All right, well part two for today.
Steve Lewit: All right, part two.
Gabriel Lewit: Today’s going to be a bit more money focus. We talked just a little bit about this autopilot target date fund here just a second ago. And so, part two of our show today, we’re going to talk about target date funds. What they are, should you have them, are people invested in them? Quick answer is yes, they are investing in them at a greater clip, mostly because they’re autopilot-
Steve Lewit: Billions and billions of dollars are going into these funds.
Gabriel Lewit: Mm-hmm. But that may or may not be the best thing for your retirement. Yep.
Steve Lewit: Oh yeah, I thought no response was required for that because it may or may not be the best thing.
Gabriel Lewit: All right, so let me give you a little update here. According to Morningstar, target date funds hold a record $4 trillion in assets. In fact, 8 out of 10 Vanguard 401(k) investors hold a target date fund, and this just makes me very sad. So, what is a target date fund? A target date fund will automatically shift you from more growth oriented investments like stocks, to more conservative holdings like bonds as you near what’s called a target retirement year. This is called a glide path, it automatically de-risks you a little as you get closer to retirement.
Steve Lewit: And essentially, it’s taking up on the idea that as you get closer to retirement, you’re going to need those funds so don’t take big risks.
Gabriel Lewit: Correct.
Steve Lewit: Because you could lose 30% of your money just before your retirement, you retire and then you’re in trouble.
Gabriel Lewit: Yeah. I think it’s also, I’ve said this before, I don’t know if this is stated anywhere, it’s not, but I think big 401(k)s shifted to these really as a risk reduction mechanism.
Steve Lewit: Oh no, a liability.
Gabriel Lewit: Liability reduction? Yes.
Steve Lewit: Liability. Oh, absolutely.
Gabriel Lewit: For the firm, for the company.
Steve Lewit: Oh, that’s known. Understand that your 401(k), your company is responsible for the investments in your 401(k). And what has happened over the years is people that did not do well in their investments actually sued the company for not providing enough education so that they could do well in their investments.
Gabriel Lewit: So, what they did is they created these target-date funds that, I mean, it will do a good job on average for everybody, will automatically de-risk you as you get a little closer to retirement. So, here’s the thing, the company can’t get sued.
Steve Lewit: Well, that’s basically the bottom line. If your money is in a target date fund, it doesn’t do well. That’s the fun.
Gabriel Lewit: Well, I mean-
Steve Lewit: It’s going to do what it’s going to do.
Gabriel Lewit: Look, here’s the thing. Before target date funds, if you just had to pick a mix, there was not enough education, not enough time to educate, people would pick something randomly. If they picked bond funds and then didn’t do well, they might sue the company because, “Hey, you never told me I shouldn’t be in bonds as a young investor-”
Steve Lewit: Yeah, you never educated me.
Gabriel Lewit: If they pick stocks and then the market crashed 40%, especially right before their retirement, they’re going to sue the company and say, “You never told me I could have lost all my money in these.” So, enter the target date fund, which we’re going to start you off at all stocks if you’re 20, because then you got time, and by the time you’re 60 you’re going to be in like 40% bonds so you’re going to have a much more moderate portfolio. And this is aligning with generally accepted financial planning principles, and thus they just reduce their liability substantially because they’re going to auto-enroll you in these. And should you select something else, it’s kind of user risk.
Steve Lewit: Yeah, you’re going to sign off on that though.
Gabriel Lewit: Well basically, yeah, you’re choosing something else.
Steve Lewit: And I went against the, what do you call it?
Gabriel Lewit: The recommendations, the defaults.
Steve Lewit: The recommendation of the company or the default of the company.
Gabriel Lewit: Yeah. Now, so let me give you an example of this. So again, you’re 20 years old, your retirement date at 65 would be 45 years away. So, you would choose today roughly a 2070? 2025 plus 45? Yeah, 2070. You’d choose a 2070. Damn, that sounds far away.
Steve Lewit: Good job.
Gabriel Lewit: A 2070-
Steve Lewit: Yeah, it is far away.
Gabriel Lewit: … target date fund.
Steve Lewit: It’s further away for me than it is for you.
Gabriel Lewit: And that would likely be in all stocks. Now, I just had a client who’s 40, a review recently, they were in target date funds, and we talked about getting them out of them. And I pulled it up for them and they were in, by default now, 15% bonds with 25 years to go until their retirement. And by the time you’re 50 it might be 20, 25% bonds, by the time you’re 60 it might be 30, 35% bonds, and by the time you’re 65 it’s usually 40% bonds. Again, as you get closer and closer to retirement, reducing your risk in the market. Now, is that concept a bad concept?
Steve Lewit: No, it’s a great concept.
Gabriel Lewit: The concept of-
Steve Lewit: As you get older, get more conservative in your investments. Great concept, everybody agrees.
Gabriel Lewit: But do you need to start doing that when you’re 40 with 10 or 15% bonds? It would be one question, right?
Steve Lewit: Sure. Well, it’s such an isolated decision because that target date fund doesn’t know what other funds you have. It doesn’t know your profile, doesn’t know what your short-term, medium-term, long-term plans are. It knows nothing about you-
Gabriel Lewit: It knows nothing.
Steve Lewit: And it’s saying, “Do this.” And frankly, even though the average rates of return are okay on them, that is also skewed because you have so many different parts of them in different sectors of age, we don’t know what the real returns are for each age bracket.
Gabriel Lewit: Yeah, people are just going the easy route. People like easy. “Oh, let’s just do it for me.” So, let me give you some examples. This one article, interestingly enough was pro-target date funds that I found, it just had a lot of good data. It says right here, “Strong returns. 2025 target date funds returned an average of 7.3% annualized over the last 15 years.” And funny, it says, “Beating the expected 6.3.” Now, I don’t know where they got the expected 6.3% from, but let me give you a different benchmark over the last 15 years. The S&P 500 returned I think almost 13% over the last 15 years, which is certainly better than the target date fund of 7.3.
Steve Lewit: So granted, more risk.
Gabriel Lewit: So, here’s the funny thing about benchmarks. 7.3%, “Oh, we beat our benchmark.” You just happened to choose a low performing benchmark that makes your numbers look good-
Steve Lewit: Exactly, what’s the benchmark?
Gabriel Lewit: Yeah, it’s kind of funny because these companies can create their own custom benchmarks if they want to, to always make sure that they beat their benchmark. So, I like using really common known benchmarks like the S&P. So, here’s the thing, what if you were retiring and you had a pension? This is true a lot, that’s going to cover all your income and you don’t need the money from your 401(k) or 403(b), and you just spent the last 15 years getting half the return you could have been had you been in stocks.
Steve Lewit: Exactly. Well, yeah.
Gabriel Lewit: And you don’t even need the income from it. You could have had twice as much money. So, there’s a lot of flaws inherent in target date funds, I understand the reasons they’re there, the benefits. The truth is I believe very strongly, you do too, if you have a customized plan there is no one size fits all solution. We will determine how much money you need to have saved for retirement, custom allocate how much you might want to have in safer assets or bonds, create our own custom de-risking plan as you get nearer to retirement, possibly explore using alternative options in general, especially if you retire at 60 and you aren’t … Sorry, if you plan to retire at 65 you can start to move your money at 60 into something possibly even better than a target date fund. So long story short, you probably are just going to leave a lot of money on the table, especially if you’re a youngster investing in a target date fund.
Steve Lewit: Yeah, and you take your intelligence or wisdom out of the formula, you take your life out of the formula. When you do things, and you know this Gabe, when people do things piecemeal, “I like this, it sounds good,” well, it may not connect with all the other things that it has to connect with financially in your life. You might retire early, you might retire later in life. You might have a business where you’re working that you never sell. Social security might go up or down. There’s so many unknowns and just to say, “Here, put it in here and we’re going to create a glide path for you.” Well, that’s nice, but not everybody lands their plane the same way. And I like that.
Gabriel Lewit: Yeah, and the fees-
Steve Lewit: Did you hear that?
Gabriel Lewit: I did.
Steve Lewit: That was good.
Gabriel Lewit: Now, the fees on target date funds have come down a little bit too, and that’s being pitched as a good thing, which it is still a good thing. But the average fund expense for a target date fund is 0.3% or three-
Steve Lewit: Which is really very good.
Gabriel Lewit: … tenths of a percent.
Steve Lewit: They used to be a lot higher.
Gabriel Lewit: They did. But let’s say you bought an S&P 500 index fund, that’s 0.06% typically as an expense ratio. So, even less. So long story short, am I telling you to go out and buy all stocks? No. I’m suggesting you have a plan, you work with an advisor, you really educate yourself about this versus just going the autopilot easy way I actually think contributes to this lack of understanding that we started off with, with this financial literacy quiz, because one size fits all is rarely good advice.
Steve Lewit: But here’s the thing, people don’t know what to do, implicitly they understand they don’t know what to do, and they’ve got this very simple choice. “I’m going to retire in 2070, I can buy this fund that’s going to work out all the things in between.” And I’ve got the data which says the average return was, what was it, Gabriel?
Gabriel Lewit: 7.3.
Steve Lewit: 7.3. Now, the other thing they don’t understand in financial literacy is that the average return is the average return. That means there are a lot more funds that made more than 7.3, but guess what? There are a lot of funds that probably made 2 and 3% to make the average work.
Gabriel Lewit: Maybe, and the spread may not be that different. Because I mean, generally most target date funds have similar asset allocations. And if you had 60% in bonds and 40% in stocks, and target date fund X versus target date fund Y, they’d probably be pretty close. But there’s definitely going to be some kind of deviation there, for sure, across different funds. And of course, you only get to choose what the 401(k) makes available to you. But by and large, again, I’d say work with your advisor, create a plan, figure out how much you do or don’t need to have in stocks or bonds, and build your own custom allocation that’s really better suited for you.
Steve Lewit: Yeah, you’re going to a restaurant, do you want the restaurant to create your meal or do you want to pick and choose on the menu what the best meal is for you?
Gabriel Lewit: Some people like the prefix options, most people like to create their own.
Steve Lewit: But they still need to pick. Oh, you mean like give me the full eight courses of meat?
Gabriel Lewit: No, sometimes you go somewhere, and it says, “Hey, we’ve got this prefix option,” and there’s something in there you don’t like but you buy it anyways. It’s not customized to you. If you could customize those, then you’re like, “Oh, can I change the prefix option?” And they’re like, “No, you can’t.” It’s like, ah.
Steve Lewit: I was so excited, I thought I had two good analogies in a row, but only one.
Gabriel Lewit: The plane one was pretty good.
Steve Lewit: Yes, okay.
Gabriel Lewit: All right folks, we got a wrap for today. If you have questions for us, call us (847) 499-3330, or go to sglfinancial.com, click contact us and we’re here to help you with a complimentary introduction call to talk through all your financial questions, needs, worries, or concerns, and help create a safe and reliable investment strategy game plan for you.
Steve Lewit: It would be our pleasure.
Gabriel Lewit: All right, everybody, have a wonderful rest of your day. Happy July 4th. There won’t be a show next week, I will be out of town on vacation, but if there’s anything you need, call the team here and we are all here to help you anytime.
Steve Lewit: Stay cool.
Gabriel Lewit: Bye now.
Steve Lewit: Bye.
Announcer: Thanks for listening to Our 2 Cents with Steve and Gabriel Lewit. For any questions about your finances, give SGL a call at (847) 499-3330, or visit us on the web at sglfinancial.com, and be sure to subscribe to join us on next week’s episode.
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