Financial Literacy: Essential Skills for a Secure Retirement

Financial literacy is the concept of understanding how money functions and how it can work to our advantage as we spend and save. While it’s a broad term that doesn’t have one set definition, it generally refers to understanding how to manage your money, how banks and financial institutions work and what the important markers of the U.S. economy mean.

Think of understanding finances like speaking a language. Some people might have a rudimentary handle on a language, while others may have a stronger grasp of it or even be fluent. Financial literacy works the same way.

Being financially literate can help you make sound financial decisions in all stages of life, but it becomes even more critical when planning for retirement.

Financial literacy is not about becoming an expert. You don’t need to possess the same knowledge as someone who works on Wall Street — but you should grasp the fundamentals and develop your skills.

One area of financial literacy that’s important for retirement planning and living in retirement is the ability to build and maintain an effective personal budget. Although it’s a basic skill, it’s also something few people actively do. A 2020 Intuit survey found that 65% of Americans did not know how much money they spent in the previous month.

Living month-to-month without tracking your expenses may be feasible when you’re young, in the workforce and single. But family life brings more bills, more monthly complexity and more targets to save for — a house, college tuition and retirement, to name a few. Once you’ve retired, you generally rely on finite savings along with Social Security. So effective budgeting today can be the difference between an easy retirement and a hard one.

Planning your retirement budget when you are younger can be tricky. You may not know exactly how much money you will need in 30 or 40 years. But even creating a theoretical retirement budget can help you better grasp the savings you’ll need for a comfortable retirement.

Being able to save that money effectively is another key financial literacy skill. There is no way around the fact that serious savings are necessary to make a secure retirement a reality.

Understanding how much savings you need and incorporating those savings into your month-to-month expenses can make all the difference.

Not only can being financially literate help you plan better for retirement, but it can also give you a stronger sense of how much you need to save — and how to get there.

One key to retirement planning that hurts some people is the importance of starting at a young age. Saving for retirement isn’t something to think about when you hit your 50s. The most effective retirement savers start early, letting the money they put away work to their long-term advantage.

Having a strong understanding of financial literacy can help you understand the most effective ways to save your money as well. It’s not always as simple as just sticking a percentage of your paycheck into a savings account.

Being financially literate can also help you understand how to maximize the effectiveness of common retirement savings vehicles like 401(k)s and IRAs. It can also help you navigate other potentially lucrative financial products that everyday Americans don’t consider, such as certificates of deposit and annuities.

Many financial pitfalls can catch financially illiterate retirees by surprise.

Of these, a major concern is not saving enough money to last throughout retirement. This can stem from a lack of financial literacy or understanding of how saved money can grow over time with little extra effort on your part. But some may have the tools and the motivation to start saving for retirement and still fail to grasp how much money they’ll really need for life after working.

One area especially easy to underestimate is the impact of medical costs during retirement. A 2022 study by the Center for Retirement Research at Boston College found that half of all Americans spent at least $4,311 on out of pocket medical costs in 2018. In fact, the study concluded that median medical costs alone can take up 25% of your Social Security benefits.

And another potential pitfall that can majorly affect your retirement savings is approaching your golden years with unresolved debt. Taking on debt isn’t always a bad thing and can be a healthy part of your financial strategy, but getting out of debt before your finances tighten up in retirement is important.

Financial literacy is not just for professionals. There are many resources available for both seniors and Americans still saving for retirement to improve their financial literacy.

The U.S. Department of Labor, for example, collaborated with the Social Security Administration and the Centers for Medicare and Medicaid Services to produce a retirement toolkit that offers lots of important and digestible information related to retirement savings all in one place.

You can also take advantage of the National Credit Union Administration’s Financial Literacy & Education Resource Center, which offers a hub of many resources and guides that are publicly available. A similar directory is available through the Office of the Comptroller of the Currency.

On top of educational resources, there are many easy-to-use calculators available online that can offer you a snapshot of how your finances are stacking up and what you need to fix for retirement.

RetireGuide offers calculators, including our tool designed to help assess your retirement savings health and a Medicare coverage simulator for estimating how much different health conditions will cost retirees.