Baby Boomer Retirement Security: The Roles of Planning, Financial Literacy, and Housing Wealth

40 Pages Posted: 19 Feb 2008

See all articles by Annamaria Lusardi

Annamaria Lusardi

Stanford University - Stanford Institute for Economic Policy Research

Olivia S. Mitchell

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

Multiple version iconThere are 3 versions of this paper

Date Written: April 2006

Abstract

Recent research on wealth and household finances seeks to blend neoclassical models with an understanding of real-world imperfections to answer questions about why some people save and others do not. This paper focuses on Baby Boomers standing on the verge of retirement, many of whom have saved little and will face financial insecurity in old age. The new 2004 wave of the Health and Retirement Study is invaluable for this first analysis of the financial situation of leading-edge Boomers, as it reports not only wealth levels but also information about respondents' planning behaviors and economic literacy. We show that the distribution of net worth among Early Baby Boomers is quite skewed; those in the 75th percentile had over 10 times the net worth ($400K) of households in the bottom 25th percentile ($37K). There is substantial heterogeneity in wealth within this cohort: the median high-school dropout had less than $23K in total net worth, while the median college graduate had over 10 times as much. Many Black and Hispanic Boomer households hold miniscule levels of wealth. Further, many in this cohort have accumulated little wealth outside their homes: at the mean, one third of the early Boomers' wealth is held in the form of home equity, and at the median the fraction is close to half. Since many members of this EBB cohort are reaching retirement with a substantial portion of its wealth in housing, they are particularly vulnerable to housing value shocks. By contrast, holders of stocks, IRAs, and business equity are concentrated in the top quartiles. Finally, we show that planning and economic literacy are important predictors of savings and investment success.

Suggested Citation

Lusardi, Annamaria and Mitchell, Olivia S., Baby Boomer Retirement Security: The Roles of Planning, Financial Literacy, and Housing Wealth (April 2006). Michigan Retirement Research Center Research Paper No. WP 2006-114, Available at SSRN: https://ssrn.com/abstract=1094808 or http://dx.doi.org/10.2139/ssrn.1094808

Annamaria Lusardi (Contact Author)

Stanford University - Stanford Institute for Economic Policy Research ( email )

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Olivia S. Mitchell

University of Pennsylvania - The Wharton School, Pension Research Council ( email )

3302 Steinberg Hall-Dietrich Hall
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Philadelphia, PA 19104-6302
United States

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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