FINANCIAL EDUCATION FINANCIAL EDUCATION AND RETIREMENT AND RETIREMENT

PLANNINGPLANNING

Robert ClarkRobert Clark

North Carolina State UniversityNorth Carolina State University

IMPORTANCE OF FINANCIAL IMPORTANCE OF FINANCIAL EDUCATION IN PLANNINGEDUCATION IN PLANNING

Individuals develop retirement plans Individuals develop retirement plans based on their financial knowledgebased on their financial knowledge

Essential information includesEssential information includes– Financial mathematicsFinancial mathematics– Risk and return to financial assetsRisk and return to financial assets

SETTING RETIREMENT SETTING RETIREMENT GOALSGOALS

Individuals develop their retirement Individuals develop their retirement plans by evaluating their preferences plans by evaluating their preferences for: for:

Consumption today and tomorrowConsumption today and tomorrow

Work and leisureWork and leisure

RETIREMENT GOALSRETIREMENT GOALS

Age of retirement Age of retirement

Retirement income compared to Retirement income compared to preretirement earningspreretirement earnings

LIFECYCLE MODELLIFECYCLE MODEL

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RETIREMENT SAVINGSRETIREMENT SAVINGS

Retirement savings can be in the Retirement savings can be in the form of:form of:

Social Security – mandatory coverageSocial Security – mandatory coverage

employer pension plans – varies by employer pension plans – varies by employer coverage and worker choiceemployer coverage and worker choice

personal savings - optionalpersonal savings - optional

EMPLOYER PENSIONSEMPLOYER PENSIONS

This research considers individual This research considers individual decisions about assets in employer decisions about assets in employer pension plans provided by pension plans provided by universitiesuniversities

Basic defined contribution plans, Basic defined contribution plans, typically required by employertypically required by employer

Supplemental or optional defined Supplemental or optional defined contributionscontributions

KEY SAVINGS DECISIONSKEY SAVINGS DECISIONS

when to start making contributions to when to start making contributions to supplemental pension planssupplemental pension plans

how much to contribute each year to how much to contribute each year to supplemental planssupplemental plans

how to invest pension accounts in how to invest pension accounts in both basic and supplemental plansboth basic and supplemental plans

FINANCIAL EDUCATION: KEY FINANCIAL EDUCATION: KEY QUESTIONS QUESTIONS

Are workers adequately informed Are workers adequately informed about financial markets and the about financial markets and the savings process?savings process?

If not, do financial education If not, do financial education programs improve the retirement programs improve the retirement savings process?savings process?

FINANCIAL INFORMATIONFINANCIAL INFORMATION

Does financial education lead to Does financial education lead to more retirement savings and a better more retirement savings and a better choice of savings methods?choice of savings methods?

Should employers provide more Should employers provide more financial education to workers who financial education to workers who are increasingly responsible for their are increasingly responsible for their own retirement savings? own retirement savings?

RESEARCH DESIGNRESEARCH DESIGN

TIAA-CREF seminars at educational TIAA-CREF seminars at educational institutionsinstitutions

Voluntary attendanceVoluntary attendance Voluntary participation in surveyVoluntary participation in survey One time educational eventOne time educational event

SURVEYSSURVEYS

Examine responses to financial Examine responses to financial education seminars presented by education seminars presented by TIAA-CREF consultantsTIAA-CREF consultants

Based on 60 seminars nationwide Based on 60 seminars nationwide that included 2,157 participants that included 2,157 participants yielding 633 usable responsesyielding 633 usable responses

SURVEY ONESURVEY ONE

Completed prior to the seminarCompleted prior to the seminar

Provides baseline financial and Provides baseline financial and demographic datademographic data

Identifies retirement goalsIdentifies retirement goals

SURVEY TWOSURVEY TWO

Completed after the seminarCompleted after the seminar

Examines whether newly acquired Examines whether newly acquired financial information affected financial information affected retirement goalsretirement goals

Asks participants to indicate whether Asks participants to indicate whether they plan to make changes in their they plan to make changes in their savings behaviorsavings behavior

SURVEY THREESURVEY THREE

Sent to participants approximately Sent to participants approximately three months after their seminarthree months after their seminar

Have actual changes in retirement Have actual changes in retirement savings behavior been madesavings behavior been made

Only 110 responsesOnly 110 responses

DID THEY LEARN?DID THEY LEARN?

Participants indicated confidence in Participants indicated confidence in their ability to apply the new their ability to apply the new knowledge gained in the seminar knowledge gained in the seminar

Participants agreed that the seminar Participants agreed that the seminar had improved their understanding of had improved their understanding of need for retirement savings need for retirement savings

KEY FINDINGSKEY FINDINGS

Financial education causes Financial education causes individuals to:individuals to:

1. rethink their retirement goals 1. rethink their retirement goals

2. plan to alter their savings behavior2. plan to alter their savings behavior

KEY FINDINGSKEY FINDINGS

One in eight respondents indicated One in eight respondents indicated that they had changed their desired that they had changed their desired retirement ageretirement age

Persons with very low expected Persons with very low expected retirement ages were more likely to retirement ages were more likely to increase them after the seminarincrease them after the seminar

KEY FINDINGSKEY FINDINGS

Three out of 10 respondents reported Three out of 10 respondents reported that they had increased their that they had increased their retirement income goalsretirement income goals

Persons with initial goals of less than Persons with initial goals of less than 65 percent were the most likely to 65 percent were the most likely to increase the desired replacement increase the desired replacement rate rate

KEY FINDINGSKEY FINDINGS

In general, participants tended to In general, participants tended to move their retirement income goal move their retirement income goal toward a replacement rate consistent toward a replacement rate consistent with being able to continue pre-with being able to continue pre-retirement consumption patternsretirement consumption patterns

KEY FINDINGSKEY FINDINGS

Women are more responsive to financial education than Women are more responsive to financial education than men. They were:men. They were:

1. more likely to raise their retirement income goal1. more likely to raise their retirement income goal

2. more likely to indicate a willingness to increase 2. more likely to indicate a willingness to increase pension contributionspension contributions

3. more likely to state that they will establish new 3. more likely to state that they will establish new supplemental retirement planssupplemental retirement plans

4. more likely to want to alter investment patterns4. more likely to want to alter investment patterns

KEY FINDINGSKEY FINDINGS

Younger individuals more likely to state a Younger individuals more likely to state a desire to make changes:desire to make changes:

1. more likely to want to increase 1. more likely to want to increase pension contributions and establish pension contributions and establish supplement pension planssupplement pension plans

2. more likely to state that they will 2. more likely to state that they will alteralter investment allocationsinvestment allocations

KEY FINDINGSKEY FINDINGS

Secretarial, clerical, and Secretarial, clerical, and maintenance personnel were more maintenance personnel were more likely to plan to increase their likely to plan to increase their retirement savingretirement saving

KEY FINDINGSKEY FINDINGS

Many individuals did not follow Many individuals did not follow through with desired changes within through with desired changes within the next three months.the next three months.

IMPLICATIONSIMPLICATIONS

Financial education seminars alter Financial education seminars alter the retirement plans and wishes of the retirement plans and wishes of participantsparticipants

Lack of action indicates inertia and Lack of action indicates inertia and the need for on-site ability to change the need for on-site ability to change behaviorbehavior

Lack of action indicates need for Lack of action indicates need for follow-up eventsfollow-up events

ISSUES TO CONSIDERISSUES TO CONSIDER

Selection bias of findingsSelection bias of findings Enticing certain workers to attend Enticing certain workers to attend

educational eventseducational events Responsibility for financial educationResponsibility for financial education Effectiveness of alternative methodsEffectiveness of alternative methods