The price of financial illiteracy

[Alan]

Thanks for the post Nords.

Unfortunately the country is full of folks like this and I see it with many colleagues at work in various forms. 3 months back when I went to recover some money from my FSA I had a problem with the website, so the the first thing I did when I got to work next day was ask a few guys if they were experiencing any problems with the website. On my corridor are 8 graduate level manager/supervisor guys and I was staggered that only 1 of them was using the FSA facility povided by the company (this has been available for many years and the company held many meetings explaining the benefits). All of them were missing out on hundreds of $ savings when I started asking if they had monthly prescriptions, eye glasses, dentist charges etc they seemed surprised that such an easy to use system was available to save them money even though they knew all about its existence.

AND, I was amazed that even when faced with this sort of free money available, only one of them is actually going to do something about it and asked me to give a demo of how to use it and show him all that is covered.

Another manager said he didn't think the savings were worth the risk of putting too much money aside and losing it. I said to him -didn't you tell me that you are going to spend $2K in January on laser correction for your eyes - you could save 28% on that alone!! I doubt he'll bother, too lazy and financially stupid. He is the same age as me but with many more years service so could retire in 18 months at 55 with a pension that is 60% of current salary but says it is not enough. ($84k/year is not enough - ouch)

[Lusitan]

As I read through the post, at first I was smugly thinking to myself how foolish these guys were.

Then I hit this part:

Quote:

They're pulling down over $140K/year in COLA'd pensions with cheap healthcare and living a fairly low-key lifestyle amid some of the world's priciest real estate ... they're in their 50s ... I suspect they're grossing at least another $120K/year.

I guess they're wiser than I am. If I could have such "problems" at 50, I'd consider myself very successful.

I could FIRE right now on HALF of their COLA's pensions and never look back.

I'm playing the world's smallest violin for them.

[Keim]

Quote:

Originally Posted by Moemg The scarey thing is most of them do not want the education .

That is because-to quote my father in law-You can't enlighten the unconscious.

And, guess who's FIL is a dedicated LBYMer?

[laurence]

Phew, talk about a case study in Zen Buddhism - they need to look within! At some point it will be too painful, they'll move to a $750k house with a $250k mortgage and survive. Or they'll BK. But don't put too much effort into it. We had married friends who had a very similar household income to us. Problem was, he couldn't stop spending. He refused to stop and wouldn't listen to anyone. When his income couldn't finance his growing lifestyle needs, he just pulled all the equity out of the house and spent it. His wife finally left him and he still doesn't see that he's done anything wrong.

[Rustward]

Quote:

Originally Posted by Nords ... They are so financially ignorant that for the last two-plus decades they've invested all their after-tax retirement money with First Command. They knew that they were paying more money for less performance than their shipmates, but they didn't really care because they were saving for retirement and First Command kept them from having to deal with all those yucky financial-management issues. ... They're pulling down over $140K/year in COLA'd pensions with cheap healthcare and living a fairly low-key lifestyle amid some of the world's priciest real estate, but they're unhappy and even a bit desperate. ... Right now they're just too dangerous to try it on their own-- and although they're anxious about their mortgage, they have absolutely no interest in learning how to handle their finances. ... If you recognize yourself in this post or if you have a seven-figure mortgage and a mortgage accelerator-- tell us what you're doing about it!

At least they do have some after tax savings. I am surprised at how many people have nothing outside of 401K/IRAs.

COLA'd pensions (~140K worth!) and cheap healthcare -- well they earned it and deserve it. We have been working for 30+ years and our total worth is less than half of their pensions alone.

You are onto something saying that they have absolutely no interest in learning how to handle their finances. If they are not interested, little else matters. One day they may become interested, hopefully before it is too late. My guess is their spending will always match the funds that are available to be spent.

What is the worst thing that can happen after the kids are through school? They could lose the house, all their after-tax savings, their jobs, all the toys, and they would have to figure out how to squeek by on a gross income of $140K with cheap health insurance! Negative health issues (if any, heaven forbid) aside, what do they have to worry about?

You said "Yet between work & family they're totally exhausted and overwhelmed.". Is this an observation, or did they actually say they are exhausted and overwhelmed? If they realize this there is a chance they might change, otherwise perhaps they think this is how life is. I dunno.

Thanks for posting this.

[Nords]

Quote:

Originally Posted by Rustward You said "Yet between work & family they're totally exhausted and overwhelmed.". Is this an observation, or did they actually say they are exhausted and overwhelmed? If they realize this there is a chance they might change, otherwise perhaps they think this is how life is. I dunno.

Observation & sea stories. She says they don't want to work but they worry about paying off the debt. But then in the next breath they'll proclaim how they have no interest in learning the financial basics that they'd need to acquire before being able to seize the reins-- they'd rather spend more time & effort in finding an advisor to do it for them.

Many veterans reserve a special little corner of hell for defense contractors (personally I save mine for a certain type of shipyard worker). It's probably a very Freudian contrast in how much he claims to despise defense contractors for three decades-- yet somehow it's the only job he considers himself qualified for. I'm not sure they appreciate their cognitive dissonance.

She says that they've heard several earsful from their parents & siblings about the size of their mortgage.

We have shipmates who compare their lives to ours and ask what we've done. Or I'll teach someone how to surf and they'll decide that they really need to investigate the ER lifestyle. This couple, however, doesn't even seem to think that it could apply to them.

[MikeD]

Quote:

Originally Posted by Lusitan I'm playing the world's smallest violin for them.

Mike D.

[clifp]

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Originally Posted by samclem It is people like these who make it hard for me to say that USPA/First Command/whatever are 100% bad. Sure, they rip off their clients. They take advantage of ignorant, vulnerable people and put them into mediocre investment vehicles. They take advantage of the younger troop's trust in his leaders by hiring retired senior officers and NCOs to bring in the sheep to be shorn. They are scum. And yet, there are thousands of their clients who would have nothing--zero-saved for retirement if they hadn't been roped in by these vermin. So, sometimes they perform a public service,though that's clearly not their intent

LOL

I saw an recruitment ad for First Command, I'll think I sign up to become an adviser. Can I use this as a testimonial, I am sure Nords can provide me with an equally gushing recommendation.

[unclemick]

I feel I should weigh in on this thread and say something but:



heh heh heh -

[CitricAcid]

The Millionaire Next Door had the best quote to describe the thought process/situation for all of these type of people - "Money is the easiest renewable source" to many people, or something along those lines.

Making such a healthy paycheck month after month with two working parents makes it seem like if they keep producing their income, the finances will simply fall into place, just by generating more. In a way, passing on a percent or two in fees and under-performances is not too bad of a problem (it is a sacrilege on this board, however). Yes, they can do a LOT better. Yes, they are wasting money on fees for things they can do themselves. But, when looking at America as a debtor nation as a whole, they could be doing worse things with their money.

Pretty much, most of these financial problems can be solved in two words:
Spend less.

[Rustward]

Quote:

Originally Posted by Nords She says they don't want to work but they worry about paying off the debt. But then in the next breath they'll proclaim how they have no interest in learning the financial basics that they'd need to acquire before being able to seize the reins-- they'd rather spend more time & effort in finding an advisor to do it for them.

Didn't take the time to do any math with this, but the couple needs to project their situation 5, 10, 15 + years into the future -- before they experience it firsthand. How long are they going to be able to work in order to service the debt of that gigantic mortgage? It seems that the house owns them and they need to get out of it.

Over time, the "don't want to work" and "worry about the debt" will probably cause them to take some action with the money pit house. Based on their history, I would not expect them to ever become DIY financial planners, though. Guess it would not hurt to try to educate them some if they ever become receptive to it.

[megacorp-firee]

? God must loves idiots and fools ... he made so many of them.

After having said that, these guys have a $140K COLAed pension and great healthcare. They can afford to be stupid with everything else.
I also am having a hard time feeling sorry for them.

Other than an intellectual curiosity, why are you so worried about them?
This is America ... we all get to do whatever stupid things we want to ...
freedom to do dumb things is part of our national culture.

... just my observation.
I also agree with the comment on this forum being a very self selected population.

[FinanceDude]

I'd offer some constructive advice, but the couple themselves seems unwilling to make the sacrifices they need to right the ship, so I will pass......

"You can lead a horse to water, but you can't make it drink"...........

[Marquette]

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Originally Posted by FinanceDude "You can lead a horse to water, but you can't make it drink"...........

If you duct-tape a hose to the horse's mouth and turn it on, the horse will drink.

[OU812]

If you salt the horses oats they will eventually drink it

[Nords]

Quote:

Originally Posted by megacorp-firee Other than an intellectual curiosity, why are you so worried about them? This is America ... we all get to do whatever stupid things we want to ... freedom to do dumb things is part of our national culture.

Well, these people are grownups. I'm not worried about them any more than I worry about a kook paddling out in 15-foot surf while I'm heading for the parking lot. But it's like having a front-row seat at a train wreck-- even if you don't know any of the passengers, the disaster evokes a certain amount of empathy. Of course it'll never happen to you, but you also want to know how to avoid having it happen to other people.

First, regardless of the reality, it's easy to feel superior to those who don't share your background. You can comfort yourself that you were raised better or you went to better schools or you had better career mentors. But these two share an awful lot of our background and training. Same schools, many of the same commands. Different warfare communities but similar billets. Same longevity & seniority. Similar security clearances. These people had to sit through, and even deliver, the same "financial responsibility" general military training that we did. I wonder what other bullets have whizzed by my head without me noticing.

Second, they are not stupid. They were leaders in their active-duty careers. They executed a horribly complex home renovation, replete with demolition/construction permits and many difficult contractors, bureaucrats, and "community servants", on budget and on schedule. They're coping with life better than some of our financially-literate shipmates who are pursuing ER. They just cannot see how their angst and financial distress is coupled to their ignorance. They think the solution to their problems lies in finding a better advisor, not in actually taking some responsibility for contributing to their decisions.

Third, I spent eight years at military training commands. I didn't just teach, I developed curriculum and tackled special problems. I was the guy who got the phone calls like "Hey Nords, these guys just failed their inspection and the survivors need some corrective training as soon as the fires are extinguished and the court-martials are disbanded. Can you come over here, figure out what needs to be done, and then do it?" This is the training challenge of the year, perhaps the decade.

The culmination of those first three factors is a target audience for a book on military ER. If indeed a veteran's ER is as simple as a COLA'd pension and cheap healthcare, then why do fewer than 15% of the veterans bother to do it? There's an important lesson to be learned here, and it's worth figuring out how to explain it to someone who thinks they make so much money that they can blow off paying their bills. If I can reach that group then I can explain it to anyone. Of course these kind of people might never read the book, either, let alone buy it, but that's only important if I use an actual publisher.

Fourth, my spouse and this woman will be spending some time together over the next year or two. It's possible (perhaps less likely than I thought) that the woman will step into the job to be vacated by the shipmate who persuaded my spouse to volunteer for this nonprofit. It's hard enough to work with this woman under these circumstances, let alone "for" her.

Finally, if this couple is so financially illiterate then I can only imagine how their kids are doing. We can't blame the public-school system for this situation.

Quote:

Originally Posted by FinanceDude I'd offer some constructive advice, but the couple themselves seems unwilling to make the sacrifices they need to right the ship, so I will pass...... "You can lead a horse to water, but you can't make it drink"...........

Well, sure, they're screwed and they're unlikely to change their behavior, but that certain knowledge didn't keep me from starting this thread. Someone else might be reading it and saying "Hey, honey, maybe we shouldn't roll over our TSP to that advisor's EIA IRA after all..."

So-- as a professional finance dude, what advice would you give to others who may stumble into this sort of situation and might be motivated to extract themselves? It could happen!

[Bimmerbill]

Quote:

They're pulling down over $140K/year in COLA'd pensions with cheap healthcare

Dang!

[USK Coastie]

So Nords how is that book project coming along? One page a day between sets? I'm sure a lot of people are waiting for. Heck I'd probably even buy a copy of it.

[Nords]

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Originally Posted by USK Coastie So Nords how is that book project coming along? One page a day between sets?

Pretty much.

Some of it is hunting down & editing old posts, much of it is contributed by you guys, some of it is new material (just as soon as I get around to creating it). Halfway through chapter four of about a dozen.

If I was a starving author I wouldn't have made it through 2007...

[CitricAcid]

Kind of like a drug addict or a similar problem, the person needs to realize they have a problem... which they seem to since they want to hire a financial advisor. After that, it is essential for them to know that they can do it, and it won't be easy. Cutting back spending, not keeping high credit card debt, saving a significant portion of their salary, maybe having to move to a smaller house. If some of the suggestions that they need to do are ignored, well they are the ones who feel the consequences. As for the kids, I am not sure if the parents are financially illiterate, it will necessarily lead to the same in the kids. Perhaps the kids see their own vision with what they want to do and don't want to be like their parents. (living in Hawaii may make this idea seem ludicrous)