Northwestern Mutual

Most Americans Fail to Make the Grade When Tested Beyond the 'ABC's' of Financial Literacy

As a group, Americans fail to make the grade when their financial knowledge is tested beyond the ABC's of financial literacy, according to a new comprehensive study commissioned by Northwestern Mutual. In fact, of the questions asked in the study, the vast majority of the more than 1,000 study participants, representing a cross section of Americans, failed to get 60 percent correct.

"Report cards are in and while they get the basics -- Americans fall short when it comes to their larger grasp of some of the more important -- and relevant -- financial matters that can affect their future," said Meridee Maynard, senior vice president of Northwestern Mutual.

The Northwestern Mutual study examined how much the general population knows about a variety of subjects that compose a financial strategy -- matters of saving and investing, risk and protection, and retirement. Elements of the overall study are being used by the company to develop an online interactive test, so the general public can grade their own financial knowledge.

"Our study showed that, yes, Americans get what some might call the ABC's of financial literacy," Maynard said. "That is, when presented with a list of answers to questions, they're able to identify correctly financial terms like asset allocation, diversified portfolio and IRA. But, we would argue that in today's complex world it's simply not enough to know the basics."

For example, according to the Northwestern Mutual study, Americans as a group score the equivalent of failing grades when it comes to their grasp of important financial matters like:

    * The best long-term protection against inflation and other adverse
      market conditions (surprisingly, more Americans erroneously pick bonds
      over stocks).
    * The insurance impact of leaving a job (most wrongly believe they will
      be able to take their group life or disability policies with them).
    * The real costs of nursing-home care (most underestimate and fail to
      protect against these costs).
    * The purpose of 529 plans (less than half know these are for education
    * The concept of index funds (less than 1 in 4 understand the concept of
      mutual funds that mirror market indexes).

"Financial literacy is indispensable to the long-term well-being of all Americans," Maynard said. "But it requires much more than just knowing the fundamentals. It's the ability to make informed and effective decisions about the use and management of money. Unfortunately, beyond the basics, Americans are coming up short."

  A Closer Look: The Report Card
  Among the findings of the Northwestern Mutual study:

    * While most Americans can correctly identify a description of asset
      allocation, they fall short in knowing how to allocate their assets to
      achieve their financial goals.  For example, only 1 in 3 correctly
      identifies stocks as the best long-term protection against inflation.
    * Despite years of publicity regarding their availability, less than
      half of Americans know that "529" plans are meant as savings vehicles
      for education.
    * Only 4 in 10 understand there is a significant insurance impact of
      leaving their job if they have group life or disability coverage.
    * Less than half understand the benefits of whole life insurance.  For
      -- less than half were aware that a whole life policy can pay
      -- only 1 in 4 knows that the cash value these policies earn is tax
    * Only 1 in 4 have a realistic idea of the cost of a year-long stay in a
      nursing home; the current average is approximately $75,000, when most
      estimate the cost to be less than $60,000.

"Clearly, in any teacher's grade book, these kinds of overall scores would indicate a need for improvement," Maynard said.

Ways to Improve

Fortunately, there are steps Americans can take immediately to begin improving their knowledge.

  One easy step is to organize financial strategy into three buckets:
    * Those matters related to risk and protection
    * Those regarding savings and investing
    * And matters regarding retirement and wealth distribution.

Another point to keep in mind is that it's never too early to start building a base of knowledge. Young kids, their parents and teachers will find an introduction to matters of financial literacy at .

There also are public libraries and websites where reliable information is available. Northwestern Mutual offers a variety of information at its Learning Center at , where people will find the following:

    * An Articles Library covering topics from business and money practices
      to insurance and investment strategies
    * A Glossary of Financial Terms, which is an informal aid to
      understanding some terms common in dealing with financial matters
    * A variety of free interactive calculators to help people estimate or
      compare many aspects of financial well-being

Moreover, the Northwestern Mutual study showed that those Americans who work with a financial professional tended to score better on the test than those who did not.

Background on the Study

Northwestern Mutual has been researching financial behavior and literacy since 2001, and this latest study looks at three aspects of what the general public terms "financial planning":

    * Aspirations: What Americans are looking for out of life regarding
      their financial goals
    * Behaviors: Whether they're taking the necessary actions to achieve
      their financial aspirations
    * Knowledge: What Americans actually know and understand about the
      complexities of a long-term financial strategy

More than 1,000 interviews were conducted of a cross section of Americans who are responsible for their family's financial decisions. All respondents were between the ages of 25 and 65 and have annual household incomes of $35,000 or more. Almost half have incomes of $75,000 or more.

The Northwestern Mutual Life Insurance Company, Milwaukee, WI (Northwestern Mutual), the nation's largest direct provider of individual life insurance, according to statistics compiled from A. M. Best data, has always received the best possible insurance financial strength ratings from Standard & Poor's, Fitch Ratings, A. M. Best and Moody's. The company has also been recognized as one of the "50 Best Companies to Sell For," by Selling Power magazine (2005).

The company, its subsidiaries and affiliates are also providers of annuities, mutual funds, long-term care insurance, disability income insurance and employee benefit services to the group employee and executive markets. These products and services are distributed through the representatives of the Northwestern Mutual Financial Network. Among Northwestern Mutual's affiliated companies are those that comprise the Russell Investment Group, which provide investment management and advisory services; Northwestern Mutual Investment Services, LLC (NMIS), a wholly-owned company of Northwestern Mutual, broker-dealer and member NASD and SIPC; and Northwestern Mutual Wealth Management Company, a wholly-owned company of Northwestern Mutual, limited purpose federal savings bank and a registered investment adviser which provides financial planning, investment management and trust services. A subsidiary, Northwestern Long Term Care Insurance Company, offers long-term care insurance.

SOURCE: Northwestern Mutual

CONTACT: Jean Towell of Northwestern Mutual, +1-800-323-7033,

Web site:

4/13/2006 2:51:00 PM