Financial Knowledge Overconfidence and Early Withdrawals from Retirement Accounts

41 Pages Posted: 16 Aug 2020

See all articles by Sunwoo T. Lee

Sunwoo T. Lee

York University; Ohio State University (OSU)

Sherman D. Hanna

Ohio State University (OSU)

Multiple version iconThere are 2 versions of this paper

Date Written: August 14, 2020

Abstract

Early distributions from retirement accounts could endanger future retirement income security, and the U.S. has restrictions to discourage them, including possible tax penalties. On the other hand, tapping one’s retirement assets may be rational when an individual encounters financial hardship. With the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act), early distribution from retirement accounts became an even more attractive option to individuals. In this study, we examined factors related to individuals’ decision of taking hardship withdrawals and plan loans, focusing on financial knowledge and overconfidence in financial knowledge, using the 2018 National Financial Capability Study dataset. We found evidence that people may be making early withdrawals without understanding possible consequences. Objective financial knowledge was negatively related to hardship withdrawals and plan loans, but the subjective assessment of financial knowledge was positively related to hardship withdrawals. Respondents with financial knowledge overconfidence (high subjective and low objective knowledge) were more likely to take early withdrawals than those with other combinations of objective and subjective knowledge. We discuss implications for public policy and financial education and advice.

Keywords: early withdrawals, financial knowledge, hardship withdrawals, overconfidence, retirement plan loans

JEL Classification: D12, D14, G41, G51, G53

Suggested Citation

Lee, Sunwoo and Lee, Sunwoo and Hanna, Sherman D., Financial Knowledge Overconfidence and Early Withdrawals from Retirement Accounts (August 14, 2020). Available at SSRN: https://ssrn.com/abstract=3673984 or http://dx.doi.org/10.2139/ssrn.3673984

Sunwoo Lee (Contact Author)

York University ( email )

Toronto, Ontario M3J 1P3
Canada

Ohio State University (OSU) ( email )

Columbus, OH
United States

Sherman D. Hanna

Ohio State University (OSU) ( email )

1787 Neil Avenue
Campbell 265D
Columbus, OH 43210
United States
614-292-4584 (Phone)

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