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http://ssrn.com/abstract=881847
 
 

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Financial Literacy and Planning: Implications for Retirement Wellbeing


Annamaria Lusardi


The George Washington University School of Business; National Bureau of Economic Research (NBER)

Olivia S. Mitchell


University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

December 2005

Michigan Retirement Research Center Research Paper No. WP 2005-108

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.

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Date posted: February 21, 2008  

Suggested Citation

Lusardi, Annamaria and Mitchell, Olivia S., Financial Literacy and Planning: Implications for Retirement Wellbeing (December 2005). Michigan Retirement Research Center Research Paper No. WP 2005-108. Available at SSRN: http://ssrn.com/abstract=881847 or http://dx.doi.org/10.2139/ssrn.881847

Contact Information

Annamaria Lusardi (Contact Author)
The George Washington University School of Business ( email )
School of Business and Public Management
Washington, DC 20052
United States
HOME PAGE: http://business.gwu.edu/faculty/annamaria_lusardi.cfm
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Olivia S. Mitchell
University of Pennsylvania - The Wharton School ( email )
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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