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THE ROLE OF FINANCIAL LITERACY IN DETERMINING RETIREMENT PLANS

Authors

  • ROBERT L. CLARK,

    1. Clark: Professor, Department of Economics and Department of Management, Innovation, and Entrepreneurship, North Carolina State University, 2308 Nelson Hall, Raleigh, NC 27695. Phone 919-515-4568, E-mail robert_clark@ncsu.edu
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  • MELINDA SANDLER MORRILL,

    1. Morrill: Assistant Professor, Department of Economics, North Carolina State University, Box 8110, 4144 Nelson Hall, Raleigh, NC 27695-8110. Phone 919-515-0331, E-mail melinda_morrill@ncsu.edu
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  • STEVEN G. ALLEN

    1. Allen: Associate Dean for Graduate Programs and Research, Poole College of Management, Professor of Business Management and Economics, Academic Director, MBA Program, North Carolina State University 2124 Nelson Hall, Raleigh, NC 27695-7229. Phone 919-515-5584, Fax 919-515-5073, E-mail steve_allen@ncsu.edu
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    • This research is funded, in part, by a grant from FINRA Investor Education Foundation. We would like to thank Jennifer Maki, Mehtab Randhawa, Evan Rogers, and Ruirui Sun for their research assistance. The research could not have been accomplished without the cooperation of the companies that partnered with us. We would also like to thank Nicholas Horsewood, Annamaria Lusardi, Olivia Mitchell, and two anonymous referees for useful comments. All remaining errors are our own.


Abstract

Workers nearing retirement face many important, and often irreversible, choices. We collected detailed demographic and financial literacy data on over 1,500 workers nearing retirement at three large companies to assess how individuals are planning for retirement. Many respondents display limited knowledge and understanding of public and company-provided retirement benefits. Controlling for basic demographics and wealth, we find that misconceptions about eligibility ages and plan generosity influence workers' expected age of retirement. Although retirement-related decisions will affect workers' well-being for the remainder of their lifetimes, many do not possess enough basic financial knowledge to confidently make optimal choices. (JEL J26, J320, J240)

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