AN OVERVIEW OF WORK REVIEWED BY GROUP I OF THE MINORITY RETIREMENT SECURITY GRANT TEAM ELIZABETH ARNOTT-HILL, PHD CHICAGO STATE UNIVERSITY Financial Literacy: A Necessary, but Not Sufficient, Criterion for Effective Retirement Planning

Financial Literacy in the United States What is financial literacy?  “A measure of the degree to which one understands key financial concepts and possesses the ability to manage personal finances throughout the lifecycle.” (Remund, 2010)  Although researchers differ regarding the specific skills included in financial literacy, the ability to successfully plan for retirement is always included. Why?  The average US citizen can expect to live to age  Social security reserves are dwindling.  The US population is aging.  Traditional pensions are less common than in the past, so most will have to rely on individual savings for retirement.

Financial Literacy in the United States Measures of financial literacy suggest that literacy rates are low in the US.  In 2013 study by the National Financial Educators Council, the average financial literacy score was 58%, with only 27.2% of individuals scoring above 70%.  The 2010 Financial Literacy Survey of Adults conducted by the National Fountain for Credit Counseling indicated that 78% of adults feel that they need financial advice and only half of surveyed households have a budget.

Financial and Retirement Security Disparities Both race/ethnic and gender differences exist in measures of financial health:  Minorities with equal levels of income and education have much less wealth than their white counterparts (Center for American Progress, 2014)  Women also have less accumulated wealth than men (  Minorities and women have lower incomes than their white male counterparts (  Minorities and women participate at lower rates in personal retirement plans (IRAs and 401Ks) than white males, and are much more likely to live in poverty during retirement (Rhee, 2013)

The Response: Financial Literacy Interventions Financial literacy interventions differ in scope and in manner of delivery Examples:  Employer sponsored / private sector education  School-based interventions  Credit and mortgage counseling / financial planning (one-on- one)  Community-based education (through churches, community centers, etc.)  Online courses or workshops

Effectiveness of Interventions It would seem that increased financial literacy would result in better financial decisions, but reviews of the literature indicate that the behavioral implications of increased literacy are mixed (see Hathaway & Khatiwada, 2008 and Gale & Levine, 2010) In other words, those that know better, don’t always do better!

Why is the Evidence Inconclusive? 1) Interventions are faulty  Fox, Bartholomae, & Lee, 2005; West, ) Measures of outcomes are faulty  Hathaway & Khatiwada, 2008; Schmeiser & Seligman, 2013; West, ) Other factors are at work  Gale & Levine, 2010; Hathaway & Khatiwada, 2008; Lusardi, 2005

What Else Impacts Financial Behavior? Income level disparities  If one earns less, one has less to save.  White Americans have significantly higher incomes than Americans of other race/ethnic groups; men significantly outearn women ( The wealth gap continues to increase (Pew, 2010). Socio-cultural differences  Banking behavior, spending patterns, financial goals, levels of financial literacy, and access to programs and education differ across racial/ethnic groups (Lusardi, 2005; Rhee 2013)

What Else Impacts Financial Behavior? Psychological differences (Knoll, 2011)  Various psychological factors influence financial decision making and retirement planning, including, but not limited to:  The context of decisions  The inability to correctly predict future happiness, including the length and intensity of positive feelings resulting from retirement  Differences in weighing immediate vs. long-term rewards  Inappropriate or inaccurate planning behaviors  Desire to emotionally distance oneself from thinking about older age and retirement

Conclusion The risk of living in poverty during retirement is increasing for Americans, particularly minorities and women. One-size-fits-all interventions should not be expected to work. Instead, interventions must be tailored to address the specific issues for the population of interest. In order to close the wealth gap and increase retirement security, successful interventions are particularly important in minority communities (Rhee, 2013). In addition to individual-level interventions, changes in public policy are necessary in order to help Americans plan for retirement (Gale & Levine, 2010)

Resources For US population stats:    For US literacy stats:  uncil.org uncil.org   For Retirement Research  rch/topics/retirement rch/topics/retirement  /en/topics/retirement /en/topics/retirement  Financial Literacy Online 