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Workers Need to Boost Personal Financial Knowledge to Make Informed Retirement Decisions

However, economists at the North Carolina State University College of Management found that a significant number of workers on the verge of retirement have a rather low level of financial literacy. The findings came from research conducted over the past year with funding from the FINRA Investor Education Foundation.

Researchers working on this project are Dr. Robert Clark and Dr. Steve Allen, both professors of economics and management, innovation, and entrepreneurship, and Dr. Melinda Morrill, research assistant professor in economics, all in the NC State University College of Management.

Results of their research, including presentations by a number of the national companies and government institutions who participated in their study, were presented at the Pre-Retirement Planning in the Workforce Symposium held in Raleigh, N.C. last month. A Pension Research Council Working Paper summarizing the symposium presentations – Improving Workers’ Financial Literacy: A Symposium Summary – is now available online on the NC State College of Management website and the Pension Research Council website. [http://www.pensionresearchcouncil.org/publications/document.php?file=819]

The best place for older workers to get the financial education they need may be the work place, since many of the important retirement-related decisions concern the benefits and policies of employers, said Clark, lead researcher on the project.

Many large employers already provide some type of retirement planning programs; however, these programs have rarely been systematically examined for their effectiveness. Clark and his research partners studied the role and effectiveness of pre-retirement financial education and retirement planning programs of nine large national employers, surveying their employees before and after they attended employer-provided programs.

Clark and his colleagues are continuing research on retirement-related financial literacy through their involvement in The Rand Center, a consortium of financial literacy centers funded by the U.S. Social Security Administration and housed at the Rand Corporation, Boston College and the University of Wisconsin. The consortium includes Dartmouth College and the Wharton School; The NC State College of Management is a member of the Rand Center.

Following are key points from the working paper.

  • A little financial planning goes a long way. One symposium presenter reported that the average net worth of those who say they did “just a little” financial planning was nearly double that of those who said they never engaged in financial planning
  • State government offices are becoming increasingly important players in financial education, helping to inform residents of financial scams as they investigate and prosecute those involved in financial crimes.
  • For older workers, the choices are less about accumulating additional resources for retirement and more about how to manage the wealth they have accumulated over their careers.
  • Long-term changes in employer retirement policies are requiring increased individual responsibility for accumulating and managing retirement assets. This means workers will need a better understanding of financial mathematics, risk and return characteristics of investments, annuitization of retirement assets, and managing funds throughout retirement.
  • Individuals must be financially literate to navigate the complex financial decisions to achieve their desired levels of retirement income.
  • Workers should not view Social Security as the sole source of retirement income; rather, it is one leg of a three-legged stool, with the other two being company retirement plans and individual saving.
  • When companies recognize employee demand for financial education and retirement planning assistance, and when firms develop such seminars and programs, the employees appreciate and value this type of employee benefit.
  • There is a positive correlation between people’s financial literacy and their net worth. That requires teaching people how to “read and write” financially so they can understand information about money, simplifying financial information into step-by-step processes that are easy to follow, and focusing on implementation as a strategy.