Take the Test to Predict Your Retirement!

Are you ready for a little quiz? 

How you perform can statistically predict how comfortable your retirement will be!

Two thirds of the population can’t answer the questions, no matter which country they live in.

Please play the game and write your answers somewhere. It could be on a piece of paper, your cell phone, your tablet, your computer, or even your hand. Just write them down somewhere so there is no confusion. Rest assured that nobody will know. It will be our little secret.

Are you ready for the 3 questions?

Question 1: “Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?”

1. More than $102
2. Exactly $102
3. Less than $102

Question 2: “Please tell me whether this statement is true or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.”

1. True
2. False

Question 3: “Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account?” 

1. More than today
2. Exactly the same
3. Less than today

Before we go over the correct answers, here are some comments about the results:

• Among Americans aged 50 and older, only half of them answered the first 2 questions correctly.
• Only 1/3 got all 3 right.
• Results were generally similar among the broader American population.
• 81% of Americans with high school degrees couldn’t answer all 3 questions correctly.
• 56% of Americans with college degrees didn’t get all 3 questions right.
• Answers were similar among people “in relatively rich countries with well-developed financial markets such as Germany, the Netherlands, Switzerland, Sweden, Japan, Italy, France, Australia and New Zealand.”
• “Performance was markedly worse in Russia and Romania.”

The questions were designed by Olivia Mitchell, Wharton business school professor, and Annamaria Lusardi, George Washington School of Business professor*.

The authors of the study conclude that people who can’t answer the questions display “widespread financial illiteracy.”

So why should you care about the questions? Because the greater your financial knowledge, the better you are at saving and investing, and the more comfortable your retirement will likely be.

In case you didn’t ace the questions, let’s explain the correct answers.

Question 1. “Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?”

If you make 2% on $100, you will have $102 at the end of year 1.

During year 2, you will still make 2%, but on $102. This is called compound interest. So you will have a bit over $104.

During year 3, you will still make 2%, but on $104, so you’ll have a bit over $106, etc.

So for sure you will have more than $102, which means that answer A is correct.

Question 2. “Please tell me whether this statement is true or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.”

If you invest $1,000 in a single stock, like Microsoft, your risk is high. If anything happens to Microsoft, you could lose a lot of money. However, if you invest $1,000 in a mutual fund, which contains dozens or hundreds of stocks such as Microsoft, Facebook, Netflix and Boeing, your risk is lower because it’s spread over multiple companies.

This has nothing to do with your return on investment, or how much you’ll make. It has to do with diversifying, or not putting all your eggs in the same financial basket. So answer B is correct.

Now, in reality, it’s a bit more complicated than that, since there are super safe stocks, and super risky mutual funds, but let’s keep it simple for now.

Question 3. “Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account?”

Say you make 1% on $100 you put in your savings account. At the end of year 1, you’ll have $101 in your account. That’s what savings are for: to grow your money safely. But there is a silent thief that erodes your buying power every year, called inflation.

If inflation is 2% per year, you will physically have $101, but in reality you can only buy $101 minus 2%, or roughly around $99. So answer C is correct.

The 3 questions are designed to test people on 3 basic principles of personal finance:

1. Compound interest
2. Diversification and  
3. Inflation.

In other words:

1. How does money grow? 
2. How does diversification reduce your investing risk? 
3. How does inflation silently shrink the value of your money over time?

Here’s the conclusion of the study: people most likely to ace the quiz are affluent. The two authors attribute 1/3 of America’s wealth inequality to “the financial-knowledge gap separating the well-to-do and the less so.”

Poor financial knowledge leads to poor financial decisions, which lead to money wasted or lost, which leads to delayed or not-so-rosy retirement.

The solution? Educate yourself. Read a book on personal finance. It may not be sexy, but it could change your life.

Of course, financial education is our mission at Veterinary Financial Summit. Join the online Community to start your financial journey.

Phil Zeltzman, DVM, DACVS
Meredith Jones, DVM
Co-Founders of Veterinary Financial Summit

*Olivia Mitchell and Annamaria Lusardi. “Financial Literacy and Planning: Implications for Retirement Security and the Financial Marketplace.” Oxford University Press 2011, p. 17-39.

How to Educate Yourself

Interested in becoming financially literate? Here are a few ways to do it:

• Pick a book from one of the financial gurus, such as Suze Orman or Dave Ramsey.
• Read the classics, including the “Millionaire Next Door” (Thomas Stanley and William Danko), “The Richest Man In Babylon” (George Clason) and “Rich Dad, Poor Dad” (Robert Kiyosaki).
• Join the Veterinary Financial Summit Community.
• Find someone you trust who has a lot of “legit” experience with financial matters. Take them out for lunch or dinner, as many times as needed, and ask them to give you a crash course in personal finance. It will be the cheapest education you’ll get.