Financial Literacy and Suboptimal Financial Decisions at Older Ages

52 Pages Posted: 30 Oct 2019

See all articles by Joelle H. Fong

Joelle H. Fong

National University of Singapore

Benedict S. Koh

Singapore Management University - Lee Kong Chian School of Business

Olivia S. Mitchell

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

Susann Rohwedder

RAND Corporation

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2019

Abstract

Over the life-cycle, wealth holdings tend to be highest in the early part of retirement. The quality of financial decisions among older adults is therefore an important determinant of their financial security during the asset drawdown phase. This paper assesses how financial literacy shapes financial decision-making at older ages. We devised a special module in the Singapore Life Panel survey to measure financial literacy to study its relationship with three aspects of household financial and investment behaviors: credit card debt repayment, stock market participation, and adherence to age-based investment glide paths. We found that the majority of respondents age 50+ has some grasp of concepts such as interest compounding and inflation, but fewer know about risk diversification. We provide evidence of a statistically significant positive association between financial literacy and each of the three aspects of suboptimal financial decision-making, controlling for many other factors, including education. A one-unit increase in the financial literacy score was associated with an 8.3 percentage point greater propensity to hold stocks, and a 1.7 percentage point higher likelihood of following an age-appropriate investment glide path. The financial literacy score is only weakly positively linked with timely credit card balance repayment, both in terms of statistical significance and estimate size.

Keywords: retirement, financial literacy, credit card debt, stock market nonparticipation, life-cycle investment, household portfolio

JEL Classification: D14, E21, G11, J32

Suggested Citation

Fong, Joelle H. and Koh, Benedict S. and Mitchell, Olivia S. and Rohwedder, Susann, Financial Literacy and Suboptimal Financial Decisions at Older Ages (October 1, 2019). Available at SSRN: https://ssrn.com/abstract=3473614

Joelle H. Fong (Contact Author)

National University of Singapore ( email )

469C BUKIT TIMAH ROAD, LKYSPP
SINGAPORE, Singapore 259771
Singapore

HOME PAGE: http://https://lkyspp.nus.edu.sg/our-people/faculty/fong-hung-yee-joelle

Benedict S. Koh

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

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

Susann Rohwedder

RAND Corporation ( email )

P.O. Box 2138
1776 Main Street
Santa Monica, CA 90407-2138
United States

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