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"American workers are increasingly responsible for securing their own retirement. Yet only a minority of American households feels “confident” about retirement saving adequacy, and one third of adults in their 50s say they have failed to develop any kind of retirement saving plan at all (Lusardi 1999, 2003; Yakoboski and Dickemper, 1997). What explains this low level of retirement preparedness? Why do people do such a poor job, when it comes to designing and carrying out retirement saving plans? This paper explores the hypothesis that poor planning may be a primary result of financial illiteracy.
1. Financial illiteracy is widespread among older Americans.
2. Retirement calculations are not an easy task: only 31% of these older people had ever tried to devise a retirement plan, and only two thirds of these succeeded. For the sample as a whole, only 19% engaged in successful retirement planning.
3. Financial knowledge and planning are clearly interrelated.
4. The respondents who did plan were less likely to talk to family/relatives or coworkers/friends than they were to use formal means such as retirement calculators, retirement seminars, or financial experts.
5. Keeping track of spending and budgeting habits appears conducive to retirement saving.
Inasmuch as planning is an important predictor of saving and investment success, we may have uncovered an important explanation for why household wealth holdings differ, and why some people enter retirement with very low wealth (Venti and Wise 2001, Lusardi 1999). Our preliminary empirical analysis finds that financial literacy has an effect on both savings and portfolio choice."