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Financial Literacy and Retirement

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April is National Financial Capability Month, but it’s better known as Financial Literacy Month. It’s dedicated to helping people understand how to make informed financial decisions and manage money effectively.

A recent report from the TIAA Institute finds that “adults with greater financial literacy tend to have better financial well-being.” In addition:

  • Participants who had more financial knowledge were more likely to be saving for retirement.
  • Retirement readiness tends to be better among those with greater financial literacy.
  • For retirees, 88 percent of those who were the most familiar with financial literacy concepts said that their retirement has met or exceeded their expectations.
financial literacy

Financial literacy encompasses a variety of skills, but we’ll focus on some basics that are relevant to planning for a successful retirement. Whether you’re just starting your career or planning on retiring soon, mastering these skills will help you improve your future financial security.

Financial Literacy Begins With the Basics

A good way to start building your financial literacy is by understanding your current financial situation. Ask yourself some basic questions:

  • How much do you earn and spend each month? 
  • How much debt do you have?
  • Do you have any major expenses on the horizon?

If you know where you stand, you’ll be in a better position to plan.

You can estimate your pension by using the benefit calculator in Retirement Online to get an idea of what you’ll earn in retirement. (You can also check your future Social Security benefit online.)

Creating a Budget

Tracking your income and expenses can help you make better financial decisions, avoid debt, prepare for emergencies and save money.

If you don’t know how to get started, here are some tips on creating a budget. If you plan to retire soon, you can use our worksheet to create a post-retirement budget. 

Debt and Interest Rates

Debt is not necessarily bad, but it can easily derail your financial plans if you’re not careful. Credit cards pose a risk because they are easy to use and may have very high interest rates. The average interest rate is about 21 percent.

If you have credit card debt and only pay the minimum each month, you’ll make little progress on reducing the balance while the interest you accrue every month adds up. For example, if you owed $1,000 on a credit card with a 21 percent interest rate and made payments of $40 a month, it would take you 34 months to pay off, and your total interest cost would be more than $300. On the other hand, if you paid $100 a month, it would be paid off in 12 months and your total interest would be just over $100.

Saving

As a NYSLRS member, you’ll receive a lifetime pension that will be based on your years of service and earnings. Building a retirement savings to supplement your pension and Social Security can create more financial security. It’s never too early or too late to start saving for retirement. To learn more about building your savings, read our recent blog post, The Right Time to Start Saving for Retirement is Now.

Follow our blog for future posts on retirement savings and related topics.

Debt and Retirement

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If you’re planning to retire in the near future, it’s a good idea to take inventory of any debt you may owe. Paying off your debt now can give you more breathing room to enjoy the type of retirement you want.

Where to Start: Repay Your NYSLRS Loans

A high priority should be any loans you have taken from NYSLRS. If you have an outstanding NYSLRS loan balance when you retire, it will reduce your pension.

For example, if a 60-year-old Tier 4 member of the Employees’ Retirement System (ERS) retires this year owing $10,000, the annual pension reduction would be $482.84. And that reduction would continue even after the total reduction exceeds the amount owed. What’s more, at least part of the loan balance at retirement would be subject to federal taxes.

ERS members may repay their loan after retiring. However, if you choose to pay back your loan after you retire, you must pay back the full amount of the outstanding balance that was due when you retired in one lump-sum payment. Following your full repayment, your pension benefit will be increased from that point going forward, but it will not be adjusted retroactively back to your date of retirement. Visit our Repaying Your Loan After Retirement page for more information if you are considering retiring with an outstanding loan.

debt and retirement - benefit reductions for loan balances

Other Debt to Check

Another priority is paying off credit cards. The average American household with credit card debt owes more than $6,006 in revolving balances and pays about $1,029 a year in interest, according to a recent analysis of federal data.

Fortunately, a federal law makes it easier to get a handle on your credit card debt. Credit card statements must now carry a “Minimum Payment Warning.” This tells you how long it will take, and how much it will cost, to pay off your balance if you only make minimum payments. It also tells you how much it will cost each month to pay off the balance in three years.

If you have more than one credit card balance, many financial advisers recommend you pay as much as you can on the card with the highest interest, while paying at least the minimum on lower-interest cards. Once you’ve paid off the high-interest card, focus on the card with the second-highest rate, and so forth. But some advisers say it might be better to pay off the card with the smallest balance first. That will give you a sense of accomplishment, which could make the process seem less daunting.

Mortgage balances make up 70 percent of the $15.24 trillion in U.S. household debt. But should you strive to pay off your mortgage before you retire? Financial advisers differ on that question. Paying off the house will eliminate a major expenditure and allow you to spend your retirement income on other things. On the other hand, if your mortgage rate is relatively low, you may want to focus on paying off other debts or boosting your retirement savings. What will work best for you depends on your particular financial situation.