Data & Research November 17, 2011

Policy at State Level May Help Retirement Security

Residents of New Hampshire and Alaska rank at the top of financial literacy and financial behavior, while residents of Louisiana and West Virginia rank at the bottom, according to EBRI.
Reported by

Research from the nonpartisan Employee Benefit Research Institute (EBRI) finds a majority of Americans have limited knowledge about basic financial concepts such as inflation, compound interest and risk diversification, as well as low numeracy skills. Lower financial literacy is also associated with low income and education. Therefore, an important policy question is whether the lack of financial literacy can be entirely attributed to individual characteristics (such as income and education), or if institutional factors have a role in it.   

“After controlling for the effect of individual demographic characteristics, most bottom-ranked states have a statistically significant effect on their residents’ financial literacy, and almost all states have a statistically significant effect on their residents’ financial behavior,” said Sudipto Banerjee, EBRI research associate and author of the study. This suggests that there might be something going on at the state level whereby individual financial literacy and financial behavior are being shaped not only by individual demographic characteristics but also by the state in which people live.  

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

To explore that question, Banerjee used data from the National Financial Capability Study (NFCS), designed by the FINRA Investor Education Foundation, which uses a state-by-state online survey designed to measure financial literacy and financial behavior and how they vary across states.

(Cont...)

Banerjee’s study used statistical regression analysis to determine factors that can be attributed to residency in a particular state rather than other individual characteristics such as age group, ethnicity, gender, education, income, marital status and labor force status.   

New Hampshire and Alaska top the financial literacy and financial behavior rankings, respectively. Minnesota, Idaho, Washington, Colorado, Wisconsin, Utah and Maryland also appear in the top 15 of both rankings.   

Survey respondent residents of Louisiana and West Virginia were found to be at the bottom of the financial literacy and the financial behavior rankings, respectively. Mississippi, Arkansas, Tennessee, Alabama, Ohio, Kentucky, Texas and Indiana also appear in the bottom 15 of both rankings.   

Although it is unclear why these state-specific differences are found in financial literacy and financial behavior, Banerjee said the results indicate “there may be a reason for policy intervention at the state level to help Americans achieve a financially secure retirement.”  

The complete list of states' ranks is included in the report, “How Do Financial Literacy and Financial Behavior Vary by State?” available at www.ebri.org. 

The survey was conducted between June–October 2009. Survey variables are weighted to match U.S. Census Bureau distributions on certain demographic variables within each state.

Data & Research November 17, 2011

Nearly Half of Pre-Retirees Plan on Working in Retirement

One-third of pre-retirees who say they are five years away from retirement have not calculated how much income they will need.
Reported by

The Retirement Income Study from Charles Schwab found one third of respondents (33%) say they have not yet determined what their essential living expenses in retirement will be and almost two thirds (64%) say they have less than one year of cash savings at any one time for retirement living expenses.

Forty-eight percent of respondents say that in their opinion, retirement means working part-time, or that there is no such thing as retirement.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

The survey found that although most pre-retirees gave themselves and “A” or “B” grade on how prepared they are to pay themselves a monthly income in retirement, almost half would change something about how prepared they are.

The findings show:

•  Forty-eight percent would change something about how they prepared financially for retirement;

•  Less than one-third of respondents plan to have one year or more in cash savings for retirement living expenses;

•  Almost one-in-10 pre-retirees have never rebalanced a portfolio; 

•  Thirty-two percent say they wish they had calculated needed retirement income sooner; 

•  Fifty-two percent have worked with a professional adviser to create a retirement income plan, and 25% would like professional financial advice to determine how much money they will need in retirement; and 

•  Over half of respondents have four or more financial accounts as part of their retirement income plan, yet two-thirds are not prepared to use one account from which to withdraw their retirement income.  

(Cont...)

“Saving for retirement is something most Americans know they have to do, but many people are confused, scared and literally frozen when it comes to flipping the switch from saving to withdrawing,“ said Carrie Schwab-Pomerantz, Charles Schwab senior vice president. “Our data shows that people even just a year or two away from retirement don’t know how to tap their savings effectively once they transition to retirement.”

Other key findings from the Schwab study show:

  • One-third of those five years or less from retirement still need a retirement plan that incorporates all income and expenses
  • Thirty-three percent of respondents have not calculated how much money they will need annually or monthly in retirement
  • Sixty-four percent plan to have less than a year in cash at a time for living expenses
  • Seventy-two percent expect to tap into their retirement savings principal, but one-third are not sure how to do it
  • Thirty-four percent still need to determine how much money they will need on a regular basis and to develop a plan that incorporates all income and expenses
  • Forty-five percent say the most difficult aspect of retirement preparation is knowing how to allocate savings and investments in retirement to maximize retirement income
  • Forty-six percent of pre-retirees say their primary goal for their retirement savings is to receive a consistent amount of money each month
  • Eighty-one percent of pre-retirees expect their expenses to decrease or stay the same in retirement

The online survey included 1,010 respondents in the U.S. ages 55-70 from August 25-30, 2011.

Click here to view the full survey findings.  

«