2013 Conference

Financial Services

Financial Services

Lusardi and Mitchell (2011) concluded that lack of financial sophistication is one of the reasons for retirement plan failure.  We extend previous studies of retirement adequacy by testing the effect of financial sophistication on projected retirement adequacy.  Relatively little research on the impact of financial sophistication on retirement preparation has been conducted on households under the age of 51.  Therefore, we examine the impact of sophistication on retirement adequacy of U.S households with heads or spouses aged 35 to 70 and employed full-time.  In an analysis of the 2010 Survey of Consumer Finances (SCF) dataset, we found that only 45% of households are adequately prepared for retirement compared to 58% in 2007.  We tested for the effects of three proxies for financial sophistication based on previous studies: (1) education, (2) use of financial planning service, and (3) understanding of the SCF survey questions.  Our multivariate analysis shows that households with a more educated head are more likely to have an adequate retirement.  Households using a financial planner are more likely to have an adequate retirement than non-user households.  However, good understanding of the SCF survey is not significantly related to the likelihood of having an adequate retirement.