The Role of Financial Literacy in Determining Retirement Plans

Robert Clark, Melinda Sandler Morrill, Steven G. Allen

NBER Working Paper No. 16612
Issued in December 2010
NBER Program(s):   AG   LS

Workers nearing retirement face many important, and often irreversible, choices. We collected detailed demographic and financial literacy data on over 1,500 workers nearing retirement at three large companies to assess how individuals are planning for retirement. Many respondents display limited knowledge and understanding of public and company-provided retirement benefits. Controlling for basic demographics and wealth, we find that misconceptions about eligibility ages and plan generosity influence workers’ expected age of retirement. Although retirement-related decisions will affect workers’ wellbeing for the remainder of their lifetimes, many do not possess enough basic financial knowledge to confidently make optimal choices.

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