Financial Literacy and Planning: Implications for Retirement Well-Being

TitleFinancial Literacy and Planning: Implications for Retirement Well-Being
Publication TypeReport
Year of Publication2005
AuthorsLusardi, A, Mitchell, OS
InstitutionThe University of Michigan, Michigan Retirement Research Center
Call Numberwp_2005/MRRCwp108.pdf
KeywordsNet Worth and Assets, Retirement Planning and Satisfaction
Abstract

Only a minority of American households feels confident about retirement saving adequacy, and little is known about why people fail to plan for retirement, and whether planning and information costs might affect retirement saving patterns. To better understand these issues, we devised and fielded a purpose-built module on planning and financial literacy for the 2004 Health and Retirement Study (HRS). This module measures how workers make their saving decisions, how they collect the information for making these decisions, and whether they possess the financial literacy needed to make these decisions. Our analysis shows that financial illiteracy is widespread among older Americans: only half of the age 50 respondents could correctly answer two simple questions regarding interest compounding and inflation, and only one-third correctly answered these two questions and a question about risk diversification. Women, minorities, and those without a college degree were particularly at risk of displaying low financial knowledge. We also evaluate whether people tried to figure out how much they need to save for retirement, whether they devised a plan, and whether they succeeded at the plan. In fact, these calculations prove to be difficult: fewer than one-third of our age 50 respondents ever tried to devise a retirement plan, and only two-thirds of those who tried actually claim to have succeeded. Overall, fewer than one-fifth of the respondents believed they engaged in successful retirement planning. We also find that financial knowledge and planning are clearly interrelated: those who displayed financial knowledge were more likely to plan and to succeed in their planning. Moreover, those who did plan were more likely to rely on formal methods such as retirement calculators, retirement seminars, and financial experts, and less likely to rely on family/relatives or co-workers.

URLhttp://www.mrrc.isr.umich.edu/publications/
Endnote Keywords

Financial Management/Retirement Planning

Endnote ID

15600

Citation Key5630