retirement wellbeing presentation
TRANSCRIPT
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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