Financial Literacy, Retirement Planning, and Household Wealth

54 Pages Posted: 18 Oct 2011 Last revised: 2 Nov 2011

See all articles by Maarten van Rooij

Maarten van Rooij

De Nederlandsche Bank; Netspar

Annamaria Lusardi

George Washington University - Department of Accountancy; National Bureau of Economic Research (NBER)

Rob J. M. Alessie

University of Groningen; Netspar; Tilburg University - Center for Economic Research (CentER)

Multiple version iconThere are 4 versions of this paper

Date Written: August 1, 2011

Abstract

There is ample empirical evidence documenting widespread financial illiteracy and limited pension knowledge. At the same time, the distribution of wealth is widely dispersed and many workers arrive on the verge of retirement with few or no personal assets. In this paper, we investigate the relationship between financial literacy and household net worth, relying on comprehensive measures of financial knowledge designed for a special module of the DNB (De Nederlandsche Bank) Household Survey. Our findings provide evidence of a strong positive association between financial literacy and net worth, even after controlling for many determinants of wealth. Moreover, we discuss two channels through which financial literacy might facilitate wealth accumulation. First, financial knowledge increases the likelihood of investing in the stock market, allowing individuals to benefit from the equity premium. Second, financial literacy is positively related to retirement planning, and the development of a savings plan has been shown to boost wealth. Overall, financial literacy, both directly and indirectly, is found to have a strong link to household wealth.

Keywords: Financial education, Savings and wealth accumulation, Retirement preparation, Knowledge of finance and economics, Overconfidence, Stock market participation

JEL Classification: D91, D12, J26

Suggested Citation

van Rooij, Maarten and Lusardi, Annamaria and Alessie, Rob J. M., Financial Literacy, Retirement Planning, and Household Wealth (August 1, 2011). De Nederlandsche Bank Working Paper No. 313. Available at SSRN: https://ssrn.com/abstract=1945732 or http://dx.doi.org/10.2139/ssrn.1945732

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Annamaria Lusardi

George Washington University - Department of Accountancy ( email )

George Washington University School of Business
Washington, DC 20052
United States

HOME PAGE: http://business.gwu.edu/profiles/annamaria-lusardi/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Rob J. M. Alessie

University of Groningen ( email )

P.O. box 800
9700 AV Groningen
Netherlands
050-3637240 (Phone)

HOME PAGE: http://members.chello.nl/~r.j.m.alessie

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://www.netspar.nl

Tilburg University - Center for Economic Research (CentER)

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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