Even simple financial math stumps future retirees

Take this mini-quiz:

1. If the chance of getting a disease is 10 percent, how many people out of 1,000 would be expected to get the disease?

2. If five people all have the winning number in the lottery and the prize is $2 million, how much will each get?

3. You have $200 in a savings account that earns 10 percent in interest each year. How much would you have in the account after two years?

Answers are below. But if you're like most who have taken the test, from the University of Michigan's Health and Retirement Study, you won't ace it.

When 1,700 boomers in their 50s took the test a few years ago, most got the first question right. A little more than half correctly divided the lottery winnings. And only about 18 percent accurately calculated compound interest.

What this test and others reveal is that many people are stumped by even basic financial concepts. This has serious consequences, especially for the millions of baby boomers fast approaching retirement. The decisions they make at this stage can determine whether they retire comfortably or run out of money late in life.

April is National Financial Literacy Month, and a lot of effort will be made in those weeks to teach money issues to children.

And that's good; kids need to be prepared for the complex financial world that awaits them. But we need more immediately is to raise the financial literacy of older workers - before they make decisions on Social Security or what to do with a lump sum distribution from a 401(k).

Why do so many adults fail at finance?

Granted, we are bombarded by an ever-growing array of complicated financial products. But the mini-quiz isn't asking you to describe the Black-Scholes formula for pricing options, or the intricacies of derivatives and hedge funds.

Harry S. Margolis, an elder law attorney in Boston, says people are so busy juggling other responsibilities - work, kids and elderly parents - that they put money matters on the back burner. "They hope things will work out," Margolis says.

Christopher Carroll, an economics professor at the Johns Hopkins University, says finance isn't a subject that we can simply pick up: we don't have enough experiences to draw upon.

For instance, you buy groceries fairly often and can quickly learn what foods to avoid. But saving for retirement isn't something you do over and over, Carroll says. "If you have made the wrong decision, you can't have a do-over with your life."

The stakes are high. Boomers will be the first generation that will have to manage a lump sum from a 401(k), says Martha Priddy Patterson, a director with Deloitte Consulting in Washington.

"If you're someone working all your life and the most you ever earned is $50,000 and you get all of a sudden $300,0000 in your hands, that's a lot of money," she says. It can be managed so it lasts, she says, but the errors can be devastating.

"We don't have a lot of time to make it up if we mess it up," she says.

You can seek professional help, of course. But without knowing financial basics, you won't know if the adviser is good or taking you to the cleaners. And once boomers start retiring with fat 401(k) accounts, you can bet plenty of sharks will be circling.

So what's the solution?

Annamaria Lusardi, an economics professor at Dartmouth College, researches financial literacy and has written on the mini-quiz. She sees a role for government, nonprofits and academics to educate workers, but not the financial industry.

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