Building Up, Spending Down: Financial Literacy, Retirement Savings Management, and Decumulation
39 Pages Posted: 8 Dec 2009
Date Written: September 8, 2009
Abstract
As employer-provided pension plans have largely shifted from defined benefit (DB) to defined contribution (DC) pension plans, responsibility for plan investments and the accompanying risks have also shifted from the provider to the employee. Employees have to decide how much to contribute to their plans, how to allocate their retirement accounts between various investment options, and how they will spend down or decumulate their retirement funds during retirement. This raises the question of whether most employees are well-equipped to make such decisions. Empirical research suggests that large segments of the United States population do not feel financially well-prepared for retirement, and suboptimal financial decisions have been attributed to lack of financial literacy. The authors investigate this hypothesis by constructing multidimensional financial literacy indices using modern psychometric methods. They assess the relationships between a wide array of DC contribution, investment and (planned) decumulation behaviors on the one hand and these financial literacy indices on the other hand, controlling for other socio-economic and demographic determinants. Their indices measure financial literacy well, but the dimensions that they represent (objective and self-assessed financial literacy, broken down by topics) are very highly correlated, so that the multidimensional nature does not offer much additional explanatory power over a simpler one-dimensional index. Consistent with earlier empirical findings, they find large fractions of “investment mistakes”. Surprisingly, however, the relationships between investment behavior and financial literacy are often weak and nonsignificant. They do find that financial literacy is related to retirement planning, but not to retirement preparedness.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Financial Literacy and Planning: Implications for Retirement Wellbeing
-
Baby Boomer Retirement Security: The Roles of Planning, Financial Literacy, and Housing Wealth
-
Baby Boomer Retirement Security: The Roles of Planning, Financial Literacy, and Housing Wealth
-
Implications for Retirement Wellbeing of Financial Literacy and Planning
-
Wealth Accumulation and the Propensity to Plan
By John Ameriks, Andrew Caplin, ...
-
Financial Literacy and Stock Market Participation
By Maarten van Rooij, Annamaria Lusardi, ...
-
Financial Literacy and Stock Market Participation
By Maarten van Rooij, Annamaria Lusardi, ...
-
Financial Literacy and Stock Market Participation
By Maarten van Rooij, Annamaria Lusardi, ...