Annamaria Lusardi (@A_Lusardi) is the Denit Trust Chair of Economics and Accountancy at the George Washington University School of Business, where she focuses on financial literacy, personal finance and macroeconomics.
The latest wave of the National Financial Capability Study (NFCS) shows improvement in many areas of personal finance, but one indicator remains stubbornly low: Only 39% of respondents had tried to figure out how much they need to save for retirement. That’s just two percentage points more than in 2009—even though 56% of respondents said they worry about running out of money in retirement. Indeed, when asked to rate their concern on a scale of 1 to 7, they disproportionately chose 5-7.
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My research, using different measures of retirement planning, different data sets and different methodologies, finds that people who plan for their future arrive at retirement with a lot more wealth—sometimes three times as much—as nonplanners. So, if retirement planning means so much, why do so few people do it?
To answer that, let’s first debunk three myths:
Myth No. 1: The young are the ones failing to plan for retirement. Among those employed part-time, full-time or self-employed, the NFCS finds that only 45% of those aged age 23-35 have planned for retirement. However, only 54% of those aged 50-61—people much closer to retirement—have done any planning.
Myth No. 2: Only high-income workers do or can afford to plan. Among the same group of workers but with income above $50,000 (about the median income), only 58% say they ever tried to figure out how much to save for retirement. In other words, planning is not widespread even among higher income workers.
Myth No. 3: It is those with pensions who can plan for retirement. While access to a pension plan or a retirement account can be important, in fact, only 59% of workers with an employer-based or an individual retirement account have ever tried to figure out how much they need to save for retirement.
Among the impediments to retirement planning, two stand out. Even though household finances have been slowly recovering from the financial crisis, debt is a common entry on household balance sheets. This debt is a worry for many workers, and it may shorten their planning horizon. Another obstacle involves the calculations required for retirement planning, which demand some basic levels of financial literacy.
In looking at three different generations, our research finds that individuals aged 56-61 are more likely to carry debt on the cusp of retirement and those debt levels are much higher for baby boomers than for previous generations. According to the 2015 NFCS, 72% of workers have at least one source of long-term debt (auto loan, home mortgage, home-equity loan or student loan) and many also carry high-cost debt, such as credit-card debt. Most importantly, close to half (47%) of the workers age 23 to 61 in the NFCS say they have too much debt. The presence of debt tends to throw off retirement planning or prevent it altogether. That is one reason why, when we examine retirement expectations of older workers, we find that those in debt expect to continue working past regular retirement age.
Another new finding from the NFCS reveals that basic financial literacy has not moved forward—and that can derail retirement planning, too. This is especially true when savings have to be used to replace not just earnings but also to address debt repayments. Only about a third of workers (34%) have a basic understanding of interest compounding, inflation and risk diversification. Both in the U.S. and around the world, financial literacy is a very strong predictor of retirement planning. And even the many retirement calculators now available still require some basic levels of financial knowledge.
Unless we act, we face an insecure future. Access to retirement accounts is useful, but it is not enough to ensure robust levels of savings. We need to consider retirement savings more holistically, taking into consideration the many financial decisions that workers face, including how to manage debt. We also need to arm workers with the financial knowledge they need to manage their finances, including retirement savings and debt.
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