Do You Have Money Smarts?

Separating fact from fiction is one of the biggest challenges of modern life. Whether we’re exploring current events, researching health information or making financial decisions, we have to wade through a lot of bogus “facts” to find the truth.

The facts are especially important when it comes to handling our money. But unfortunately, as a recent Schwab “Money Myths” survey revealed, many Americans are operating under misconceptions that could significantly impact their financial security.1

An underlying problem, of course, is that we simply don’t know what we don’t know. In fact, the survey respondents who identified themselves as very or extremely savvy about personal finance were the most likely to agree with many of the misconceptions—especially with respect to Social Security and Medicare. For example, 38% of respondents incorrectly thought that Medicare is free once you turn 65. And 35% didn’t know that your marital status could impact your Social Security benefits.

So, how do you measure up? To compare your knowledge to that of the survey respondents, read on.

Myth 1: A will is the best way to ensure that your estate will be distributed the way you want.

We were surprised to learn that 91% of respondents agreed with this statement. While a will is a great way to ensure that certain aspects of your estate are distributed correctly, the reality is that if there are discrepancies between the beneficiaries named on your insurance policies or retirement accounts and what you’ve indicated in your will, the beneficiary designations will prevail.

Myth 2: Every adult should have life insurance.

It seems that the insurance industry has done a very good job marketing its products, because 78% of respondents agreed with this statement. But from a financial perspective, life insurance isn’t for everyone. If you don’t have dependents or business reasons to own a policy, life insurance may be a waste of money.

Myth 3: You should start taking Social Security as soon as you’re eligible.

Fifty-two percent of respondents agreed with this potentially expensive misconception. Unfortunately, many people leave money on the table because they file too early. In fact, if you wait until you’re 70 to start collecting benefits, your check will be significantly higher than if you file at age 62. Of course, it’s essential that you consider your life expectancy, potential spousal benefits and other sources of income before you make a decision. This is one of those times when you have to crunch the numbers, ideally with the help of a professional. (For more, see “When Should You Take Social Security?”)

Myth 4: You should purchase long-term care insurance when you’re in your 40s or younger.

Forty-nine percent of respondents thought this sounded right. The problem, though, is that if you purchase long-term care insurance when you’re this young, even though your premiums will be lower, you’ll be paying them over a much longer period—and therefore likely shelling out more money over time. If you’re healthy, the optimal time to consider long-term care insurance is between ages 50 and 65.

Myth 5: If you need cash while you’re still working, a 401(k) plan is a good place to turn for a loan or a withdrawal.

Thirty-three percent of respondents agreed. But to me, a 401(k) loan should be a last resort. First, you’re reducing your retirement portfolio’s potential for growth because the money you borrow is no longer invested in the market. Second, you’re risking taxes and penalties if you become unable to pay it back on time. Third, if you leave your job for any reason, you’ll need to pay back the loan immediately (typically within 60 days) or face early withdrawal penalties if you’re under age 59½. And finally, regardless of when you pay back the loan, you pay interest with after-tax dollars, which get taxed again when you withdraw the money in retirement.

If you found some of these money myths surprising, you’re not alone. The financial world is complex, and it continues to change and challenge all of us. Whenever you’re faced with a financial decision, it’s best to gather your information carefully and seek the help of a professional as needed.

Carrie Schwab-Pomerantz, CFP®, is President of Charles Schwab Foundation and Senior Vice President of Schwab Community Services at Charles Schwab & Co., Inc.


Next Steps

Get the facts on retirement planning from Carrie’s new book, The Charles Schwab Guide to Finances After Fifty (Crown Business, 2014). Visit for more details.

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