Financial Wellness

Why Are Perceptions of Financial Wellness Often At Odds With Reality?

Nearly a third of Americans believe they’re doing better – or worse – than they actually are

by Salene Hitchcock-Gear

Ms.Hitchcock-Gear is president of Prudential Individual Life Insurance, which includes Prudential Advisors, Prudential’s national sales organization. Prudential’s Individual Life Insurance business focuses on offering competitive solutions to meet the needs of consumers through the manufacturing and distribution of a diverse portfolio of life insurance products. Prudential Advisors is comprised of more than 3,000 financial professionals, advisors and fee-based financial planners who offer clients a broad range of financial solutions. Individual Life Insurance and Prudential Advisors are business units of Prudential Financial, Inc. (NYSE:PRU). 

If you could sneak a peek at every American’s finances—pay stubs, bank statements, retirement accounts, insurance coverage—what would you see? Perhaps the better question is—what don’t they see?

Both questions were at the heart of Prudential Financial’s recently released Financial Wellness Census™. More than 3,000 U.S. adults between the ages of 25 and 70 were not only asked what they own, owe and earn—objective measures of financial health—but also about their perceptions: how well they believe they are managing their money, and how optimistic or pessimistic they are about achieving their goals.

The results were telling—while the good news is that 75 percent of Americans cite having enough savings to last through retirement as a key financial goal, nearly a third of respondents have skewed views of their own financial health, believing they’re either closer or further from a secure retirement than they actually are, based on national benchmarks.
For these Americans, the math doesn’t add up the way they think it does, and therein lies the challenge. The Financial Wellness Census demonstrates a need for financial professionals who can offer a reality check and provide solutions that can fill the gaps that are currently being overlooked.

Helping Idealists and Pessimists Tap Their Potential

The Financial Wellness Census found that Americans fall into four camps when it comes to their finances and perceptions.

The “Confidents” (34 percent) are doing well and believe it, while the “Discouraged” (37 percent) are not doing well financially and recognize it. While these groups know where they stand financially and can use that knowledge to make the right choice for their future, the remaining 29 percent—the “Idealists” and the “Pessimists”—are largely in the dark.
Who are the “Idealists?” You probably know the type: the person who always sees the sunshine behind every cloud. Seventeen percent of Americans view themselves to be in good financial shape despite having low levels of objective financial health. While there’s nothing wrong with a rosy outlook, these individuals could be missing opportunities now to budget and save. They’re likely not to see the looming gap between what they have for retirement and what they need.
Another 12 percent fall on the other end of the spectrum—for them, every drizzle is a hurricane. These “Pessimists” have high levels of objective financial health but nonetheless are negative about their perceived financial health. Ironically, the financial stress they feel may have an impact on their physical health and create problems where none exist.

Protecting Families a Key Priority

A key element of financial wellness is ensuring protection for families. Fifty-nine percent of Americans say one of their top financial priorities is ensuring they can maintain a standard of living for their family and loved ones should something happen to them – yet only 57 percent say they feel confident they can achieve this goal. That aligns with a deep dive in the data showing that only 41 percent of Americans own life insurance.

Financial professionals who step into the role of trying to align clients’ current economics to their future financial goals are often not only the trusted money expert but also a counselor to clients navigating complex and emotionally charged financial situations...

Among minorities, the protection gap worsens. Seventy-five percent of Hispanics, 76 percent of LGBT Americans and two-thirds of African Americans lack life insurance coverage. Millennials also trail the general population, with 70 percent lacking coverage. Among individuals who do have life insurance, 17 percent are covered by policies purchased individually, 15 percent are covered by group policies purchase through an employer and 10 percent have both types of policies.
Why such a critical gap in ownership, even though individuals clearly see the value of protecting their family and their finances? More than a quarter of Americans without life insurance say it is too expensive, and another 22 percent say they don’t need it right now. Yet more than a quarter of Americans also expect to rely on life insurance as a vehicle to pass along wealth to their children.

A Guiding Hand Toward Financial Goals

This disconnect between the desire for protection but the lack of adequate insurance coverage points to the need for greater consumer education around the types and flexibility of life insurance – to meet all income levels and life stages. That’s where financial professionals have an important role to play.

Among the “Confidents” identified in the Financial Wellness Census, 53 percent work with a financial professional, compared to just 40 percent of “Pessimists,” 31 percent of “Idealists” and 23 percent of the “Discouraged.” A trusted financial advisor can help both “Idealists” and “Pessimists” overcome misconceptions and help them understand when and where insurance can play a role in helping them to achieve their financial goals – everything from protecting their family’s current income against the impacts of a sudden death, to helping to secure a steady income stream in retirement.

Helping Americans to live their best financial life and achieve confidence in their financial future requires an understanding of current financial health, but also a firm grasp of the psychological side of the equation. Financial professionals who step into the role of trying to align clients’ current economics to their future financial goals are often not only the trusted money expert but also a counselor to clients navigating complex and emotionally charged financial situations.

The apparent misalignment between objective and perceived financial health may have important and in some cases troubling implications. Americans in poor financial health who are nonetheless hopeful about the future may have good reason for their optimism – perhaps they are completing schooling or training that will soon boost their income. But it also could blind them to the need to revamp how they’re spending and saving.

Where clients seek to build stability and ensure the financial security of themselves and their families, advisors can help to make sure individuals are educated about the availability, types and cost of insurance products that can often go a long way toward building financial security. It’s only a piece of the puzzle in helping Americans achieve financial wellness, but financial professionals’ first step should be helping clients understand the insurance options available to them to help close the protection gap.

Advisors are necessarily committed to helping Americans improve their financial health, offering robust and innovative product and services tailored to their individual needs. Doing this requires a deep understanding not only of their current financial health but also their own perceptions of how they’re doing and where they want to go.

Addressing and helping to alleviate the financial worries of Americans, regardless of age, gender, sexual orientation or race, isn’t only about strategizing a balance between current income, daily expenses and retirement savings. There is also a critical gap to be addressed in the form of financial protection to help individuals address both their objective and subjective financial wellness, and ultimately feel more secure in their financial future. ◊