Context

Many Americans fail to plan or save effectively for retirement. The study sets out to understand whether a key reason that people do not plan well for retirement is that they lack financial capability and knowledge.

The study

The paper reports on a module that was added to an existing research survey, the Health and Retirement Study, which is a nationally representative quantitative survey conducted every two years since 1992 with Americans over the age of 50. The module was added to the 2004 survey and comprised questions on financial literacy, retirement planning, and use of planning tools. The paper looks at these issues amongst various demographic groups. The authors also classify some of the respondents by how well they have planned for retirement, as defined by questions in the module, and then analyse the results according to the classification.

Key findings

• Levels of financial literacy were relatively low with only 34% of the sample able to answer all three questions that were asked correctly. Levels of literacy varied according to key demographics such as ethnicity, level of education and gender.
• Less than a third of respondents had attempted any retirement planning at all and of those, only 58% had actually gone on to develop a plan.
• Financial literacy was found to be strongly linked to planning, with those responding ‘don’t know’ to the literacy questions the least likely to plan or succeed in their planning.

Points to consider

• The paper was written in 2011, and the data that the paper is based on was collected in 2004, which is not at all timely; it is likely that the outcome of similar research today would be different due to changes in economic conditions, regulations, government policy or financial services markets, or to interventions to improve financial literacy and retirement planning.
• The survey was conducted in North America, but some of the issues may be transferable to other parts of the world. For example, the link between financial illiteracy and poor retirement planning may also be found in other developed nations. However, the survey is now dated and there is a lack of information about the methodology, which means that any results should be treated with caution.
• The results can be used to inform financial education programmes but, again, should be treated with caution.
• There is a general lack of information about the methodology in the paper which makes it hard to judge the quality of the data. There is no information about how the survey was completed (although as respondents were interviewed with their spouses, it was likely to be a face-to-face in-home methodology). It is also not clear how many respondents were in the main survey, nor how many answered the module, and nor is it clear how the nationally representative sample was achieved. Some of the data tables indicate statistical significance, but there are few sample sizes given and no confidence intervals. One of the most serious limitations of the study is the fact that data was collected in 2004, but the paper not written until 2011, during which time there are likely to have been changes in many areas which may have affected the insight that could be drawn from the research.

Full report

Financial literacy and planning - full report