Innumeracy and my retirement vision

My cartoon character from The Principal #SeeYourRetirement campaign has taken on a life of its own. Ever since it was originally posted online, I’ve gotten lots of messages ranging from, “Have you seen this character, it sort of looks like you,” to “Hey! I know that guy!”

Friedman_SeeYourRetirement

It’s also prompted many conversations with curious people saying that they didn’t know I wanted to teach. In reality, I’ve been volunteering as a math tutor most of my life. Based on those conversations, I thought a blog post explaining the desire to teach math was in order.

My angle though, I think is a little different from others’ in the financial services industry. While we all support and encourage programs for more financial literacy, I think there is more to it than that. I think before we can assert widespread financial literacy, we need to ensure that we first have widespread mathematical literacy—or numeracy.

Innumeracy = mathematical illiteracy

I first became familiar with the concept of numeracy years ago when I read Innumeracy – Mathematical Illiteracy and its Consequences by John Allen Paulos. In this book, Paulos points out that while illiteracy is a source of embarrassment for people, innumeracy is often a source of pride as you hear people brag that they don’t get along with math or can’t balance their checkbook. Innumeracy doesn’t carry the same stigma as illiteracy—but it should.

Paulos suggests that it’s dangerous because innumeracy causes failure to understand risks, an acceptance of pseudoscience and misinformed government policies. We can see this becoming more and more pervasive in our society as political debates boil down to beliefs versus facts, and politicians spout expressions like “millionaires and billionaires” as though there is any similarity between the two (hint: there’s not).

1 in 5 people say the lottery is their best shot at retirement savings

From a retirement standpoint, I am very troubled by periodic surveys that show a significant number of people who believe the lottery is their best strategy for accumulating a significant nest egg. A 2006 study done for the Consumer Federation of America, for instance, showed 21% of the population (that’s one in five people) thought playing the lottery was their most practical strategy for accumulating several hundred thousand dollars. A similar 1999 survey showed that 40% of Americans with incomes between $25,000 and $35,000 thought the lottery would give them their retirement nest egg.

This isn’t just simple financial illiteracy but too often a basic lack of understanding of the odds published by the lottery.

For example, the odds of winning the Powerball are one in 292,000,000. While I think everyone understands that is a big number, I don’t think people understand that if you bought a ticket for every drawing, twice a week for an average adult lifetime of 60 years, you would have about a 50:50 chance of winning the Powerball over the course of 32,000 lifetimes. Put another way, playing for about 2.6 million years would give you a about a 50:50 shot of winning. That’s an awfully long time considering humanity is only about 200,000 years old. The lottery, therefore, cannot be a retirement plan, despite the believe by too large a percentage of the population that it can be.

So, how do you maximize the probability of saving for a secure retirement from a retirement plan design perspective? According to a recent study by the Employee Benefit Research Institute, a retirement plan with  automatic enrollment and an auto-escalation feature results in a 94% probability of attaining at least 60% income replacement in retirement for those in the lowest income quartile, and an  88% probability of the same income replacement for those in the top income quartile.1  Those are pretty good odds.

What’s your plan for retirement?

When I retire, I’d like to do my part to help with this problem. What’s your dream for retirement?

In addition to blogging here, I also tweet regularly about topics of interest to tax-exempt plans.

Affiliation Disclosures

1 The probability assumes total retirement income will also be complimented by income coming from Social Security, Individual needs to be eligible to participate in the retirement plan for at least 30 years.

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