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Latest Retirement Research: Track Spending, Invest in Health

Not being financially literate can be dangerous to your wealth in retirement.

What advice then do experts have for older Americans with respect to their personal finances, retirement accounts, etc. What actions should they take and/or avoid?

A bit of background: Poor financial capability can erode well-being in later life, according to Understanding Debt in the Older Population, research co-authored by Annamaria Lusardi, a professor at the George Washington University School of Business and Olivia Mitchell, a professor the Wharton School of the University of Pennsylvania.

According to that research, older Americans, ages 51-61 carry debt due to student loans and unpaid medical bills; and having children also contributes to carrying debt close to retirement.

By contrast, the research shows that the financially literate have more positive financial perceptions and behaviors. “Specifically, being able to answer one additional financial literacy question correctly is associated with a higher probability of reporting an above-average credit record and planning for retirement,” the researchers wrote. “Higher financial literacy is also linked to being less likely to carry excessive debt, being contacted by debt collectors, and carrying medical debt or student loans, even after accounting for a large range of demographics and other characteristics.”

Evidently, the researchers wrote, financial knowledge can help limit debt exposure at older ages.

Below is what Mitchell recommends doing to become more financial literate.

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Make financial management easy. Move all bills that you can to auto-pay, including the bill for your own retirement. Call your HR office or login to your retirement plan website and bump up your pension contributions. Be sure to contribute enough to get your full employer match. If you can, set up auto-escalation, so that every year, the retirement plan contribution rises automatically. As mother used to say, “If you don’t see it, you won’t spend it.”

Keep track of your spending so you know where your money goes. There are smartphone apps, or you can carry around a little notebook to write down what you spend cash on. Credit card receipts are also useful for tracking expenses. Once you know where your money goes, you can better manage your spending.

Plan to reward yourself when you do something difficult. My Wharton colleague Professor Katherine Milkman discovered that people who only let themselves read their favorite trashy novels at the gym are much more likely to get their exercise. Dr. Dina Pomeranz, who teaches economics at the University of Zurich, has shown us how to make spending fun, teaming up with a saving buddy whom you text each time you don’t spend. It can also help to set up a low-cost online savings account with a fun title such as “My Reward Fund,” and put your change in it -- spending it will be doubly enjoyable.

Invest in your health. While this isn’t exactly a financial resolution, good health will pay you back many times over, in later life. You’ll feel better and live better without as many medical bills, which can become a major source of financial stress, particularly in later life.

Invest in financial literacy. Wharton has a free website for educators, students, and just plain folks, with more than 400 lessons on personal finance, economics, entrepreneurship, accounting and marketing. Mitchell’s free financial knowledge quiz is a nice way to take stock of what you need to learn, and some fun free videos can help you make better financial decisions.

Other tips. For her part, Lusardi recommends the following actions:

  • Have and keep a buffer stock of savings, so not to turn to debt when facing a shock or an unexpected expense.
  • Make a plan to pay off your higher cost debt, for example credit card debt, including considering and evaluating other sources of credit.
  • Take advantage of the financial education/wellness programs offered by your employer, if you have this option, or your community; and make time to take care of your finances. Like in health, prevention is better than the cure.