retirement wellbeing presentation

7/31/2019 Retirement WellBeing Presentation

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Financial Literacy, RetirementPlanning and Retirement Wellbeing:

Lessons and Research Gaps

Conference on Financial Literacy inTimes of Turmoil and Retirement Insecurity

March 2009

Annamaria LusardiDartmouth College & NBER

Olivia MitchellWharton School & NBER


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The importance of financial literacy Increase in individual responsibility

From DB to DC pensions

Complexity of financial instruments

Shocks to financial markets

Consequences of mistakes

at micro and macro level


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State of financial literacy in the United States

In the past 6 years, we have documented an

alarmingly low level of financial literacy in theU.S. population

The majority of the population is unfamiliar with The power of interest compounding The effects of inflation The workings of risk diversification Basic asset pricing

Financial literacy is particularly severe amongwomen, the elderly, those with low education,and minorities


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Financial literacy is an essential tool for

investment and saving behavior

In our research we have shown

that financial literacy can belinked to

Retirement planning

Wealth accumulation

Retirement wellbeing


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Planning and Total Net Worth in the 1992 HRS

($2004) age 51-56Total net

worth

distribution

% of

sample

25th

Percentile

Median 75th Percentile Mean

Planning 1992

Hardly at

All

32.0 10,098 76,906 200,613 224,310

A Little 14.3 37,699 126,562 290,149 343,145

Somewhat 24.8 72,032 173,753 367,298 340,681

A Lot 28.9 71,393 173,686 356,796 353,523


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Planning and Total Net Worth in the 2004 HRS

($2004) age 51-56Total net

worth

distribution

% of

sample

25th

Percentile

Median 75th Percentile Mean

Planning 2004

Hardly at

All

27.7 10,300 84,100 289,900 350,770

A Little 16.7 59,700 172,000 390,500 357,215

Somewhat 27.9 56,000 189,000 450,000 367,832

A Lot 27.7 55,000 199,000 467,600 508,269


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Retirement planning and financial literacy

Retirement planning is a strong predictor of wealth

Those who plan arrive close to retirement with double the amountof wealth of those who do not plan.

Lack of planning can be traced back to lack offinancial literacy

Those who do not know about interest compounding, inflation, andrisk diversification are less likely to plan.


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Key Implications for National Retirement Policy

Target specific groups

Move away from very limited interventions

1 retirement seminar or 1 financial education session Brochures with hard data

Provide tools to help saving decisions, such asplanning aids

Use effective communication methods

One example is videos

Use basic economics and finance principles toprovide financial advice


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A multi-pronged strategy

Educate

Eradicate financial illiteracy: It is not possible to operate inthe modern financial world without being able to read andwrite financially

Simplify Saving and investing are very complex decisions

Implement

Implementation is crucial if we want to change behavior

Evaluate

What works? We need to focus on cost-effective programs


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Some specific projects

Promoting saving among younger workers

Five steps to success

New ways to help people save

Understanding risk: A guide for women

Promoting retirement planning

Financial security after retirement: It pays to plan


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Our team We have assembled:

Academics in economics, finance, and marketing

We collaborate with not-for-profit institutions

Eg: D2D Fund FINRA Investor Education Foundation National Endowment for Financial Education

We collaborate with RAND in internet surveys toevaluate programs

Eg: American Life Panel


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More work on financial literacy We showed the importance of both housing

wealthand financial literacy: Baby Boomer

retirement security: The roles of planning,financial literacy and housing wealth, Journal ofMonetary Economics 2007,

New book offers a plan for the retirement savingcrisis

Book on financial literacy to be published by

Oxford University Press in 2010

Blog on financial literacy:http://annalusardi.blogspot.com

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