• Basic Membership Access to Journal, Shadow Stock portfolio & monthly updates for stock screens
  • A+ Investor Full access to AAII.com, Journal, and a power data suite for investment ideas
  • AAII Platinum Full access to all of AAII's model portfolios and premium services at a significant discount
  • Dividend Investing Newsletter and model portfolio that focuses on dividend growth
  • AAII Growth Investing Find secular growth stocks poised for outperformance regardless of macroeconomic conditions.
  • Retirement Investing Discover trusted strategies for every stage of retirement. Get actionable insights and resources for smart retirement planning.
  • Sentiment Investing A research-driven newsletter with 10+ signals decoding sentiment across retail and institutional behavior.
  • Stock Superstars Report Get stock ideas inspired by the market's leading professionals
  • VMQ Stocks For the value investor looking to harness academic research in an actively managed portfolio
  • Bits and Bips Newsletter delivering insights on linking traditional finance, macro trends and cryptocurrency opportunities to help investors build stronger, more diversified portfolios.
All premium products come with free basic membership.
Explore All Membership Options
Join Now
Dispatches Retirement Planning

Level of Financial Literacy Impacts Retirement Preparedness

Near-retirees would be expected to take actions to reduce the odds of running out of money in retirement, yet the data shows that this is not universally the case.

by Adam Scheg | May 2022

Near-retirees would be expected to take actions to reduce the odds of running out of money in retirement, yet the data shows that this is not universally the case.

Many people carry debt, including high interest debt, into retirement. More than 30% of respondents to National Financial Capability Study (NFCS) surveys reported carrying “excessive amounts of debt close to retirement.”

Furthermore, about 28% of older Americans fail to think about or plan for retirement despite its importance, according to the study. Only 18% at least somewhat succeeded in developing a saving plan.

A common denominator was a lack of financial literacy. This characteristic was found to be associated with a lack of retirement preparedness.

The researchers developed three questions as a short way to evaluate financial literacy: 1) the capacity to do calculations related to interest rates, 2) an understanding of inflation and 3) an understanding of risk diversification. While older respondents are expected to have made many financial decisions, many did so with little knowledge of fundamental concepts. Fewer than 40% of survey respondents aged 55 to 59 demonstrated knowledge of the three concepts.

Conversely, those who were financially literate had higher credit scores. They also performed better in exercises involving tasks such as choosing the best health insurance plan. Higher levels of financial literacy are also associated with being more involved in the management of one’s finances and seeking financial advice. During the initial months of the coronavirus pandemic, financial literacy was also found to be strongly associated with financial resilience.

“Financial Literacy and Financial Behavior at Older Ages,” by Olivia S. Mitchell and Annamaria Lusardi; Pension Research Council, January 9, 2022.

Discussion

GREGORY S from MI posted over 4 years ago:

What can the financial community do better to contribute to educating all races and cultures on financial literacy? It has not always had the best record with doing that. Tends to focus on very narrow particular segment of the society.


BARRY J from TX posted over 4 years ago:

I downloaded the referenced article. This research seeks to measure facility with three basic financial concepts related to investing. A key finding was “better financial behaviors are strongly associated with greater financial literacy in later life” based on “predictions of (a theoretical) life cycle model” that “predicts older persons would be at the peak of their wealth accumulation process.” It does not measure dispositions or propensities to take responsibility for your own decisions, delay gratification, prioritize your needs versus wants, etc. It does not address how decisions earlier in life produced your financial security later in life, for example, that people handle money every day of their lives after some age. They make several dozen financial decisions every day. What do I need to live? Do I buy this? Not buy that? How much can I afford? Do I need this or just want this? Can I wait to have this? What can I do without? What are my other choices? The choices they make with whatever money they have -- or don't have -- are their own. I have encountered people all my life that have no control over their ability to do without. It is difficult to understand how ANY AMOUNT of financial education FROM ANY SOURCE (other than family and/or life experience) can undo bad personal habits. The very first conversation ANYONE has with ANY "financial professional" begins with a standard disclaimer statement in which they ensure you understand they take NO responsibility for any financial DECISIONS YOU MAKE that derive from any "educational purposes only" materials they may provide. Asking the financial community to reverse bad lifestyle habits is very similar to asking a fox to "educate" the residents of a henhouse.


You need to log in as a registered AAII user before commenting.
Create an account

Log In

Get your free copy of our special report analyzing the tech stocks most likely to outperform the market.
Download the FREE Report Here: