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Financial Literacy in Retirement Planning: Challenges and Strategies

This study explores the influence of financial literacy on retirement planning decisions, including employer and employee choices regarding retirement plans, drawdown patterns of retirement assets, and risks associated with different strategies. Various scenarios test financial knowledge and decision-making skills. Research emphasizes the economic impact of financial literacy.

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Financial Literacy in Retirement Planning: Challenges and Strategies

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  1. James Poterba MIT and NBER Adjusting Institutions for an Aging Society

  2. Heterogeneity in Male @ 65 Life Expectancy Source: Waldron (2007). Sample: men w/positive earnings, ages 45-55.

  3. Relative Incidence of Disease by Education Status Source: Smith (2014).

  4. Sources of Income, Individuals 65+, 2013 Mean Income = $6756 Mean Income = $78180 Source: Poterba (2014).

  5. Household Balance Sheets, 65-69, in 2008 Source: Poterba, Venti, & Wise (2013).

  6. Labor Force Participation Rate, 65-69 Year Olds, 1963-2011 Men Women

  7. Expected Years of Work and “Leisure” @ 65 Source: Ghilarducci (2008) with updates.

  8. Expected Years of Work and “Leisure” @ 65 Source: Ghilarducci (2008) with updates.

  9. “Risk Points” in Retirement Saving • Employer Decision to Offer Retirement Plan • Employee Decision to Participate and Amount to Contribute • Early Withdrawal Risk: Loans and Lump-Sums Plan Risks • Drawdown Pattern: Annuitize or Not? • Financial Literacy is a Challenge for Many

  10. Financial Literacy • If $100 earns 2% per year for five years, how much will you have in the account? (< $102, $102, < $102) 67% correct • If the interest rate on your saving account is 1% per year, and inflation is 2% per year, in a year, can you buy more, the same, or less? 75% correct • True or False: Buying a single company stock usually provides a safer return than a share of a mutual fund. 52% correct • All three correct: 34% • Source: Lusardi and Mitchell (2014).

  11. 401(k) Participation Before & After Automatic Enrollment Enroll After Before Source: Choi, Laibson, Madrian, and Metrick (2004)

  12. References • D. Choi, D. Laibson, B. Madrian, and A. Metrick, “For Better or For Worse: Default Effects and 401(k) Savings Behavior,” NBER WP #8651. • T. Ghilarducci, When I’m Sixty-Four. 2008. • A. Lusardi and O. Mitchell, “Economic Importance of Financial Literacy,” Journal of Economic Literature 2014. • J. Poterba, “Retirement Security in an Aging Population,” American Economic Review 2014. • J. Poterba, S. Venti, D. Wise, “Drawdown of Personal Retirement Assets,” Journal of Economic Perspectives 2013. • J. Smith, “Using International Country Data to Learn About Health,” Presentation at National Institute of Aging Conference, 2014. • H. Waldron, “Trends in Mortality Differentials and Life Expectancy…,” Social Security Bulletin 2007.

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