The role of financial literacy in financial decisions and retirement preparedness

1. Context
2. The study
3. Key findings
4. Points to consider

• Context
• The study
• Key findings
• Points to consider
• Full report

Context

The increasing life expectancy of Canadians and the decline in employer-sponsored pension plans place increased responsibility on individuals to plan and save for their own retirement. However, according to findings from the 2014 Canadian Financial Capability Survey, one in three adults is not financially preparing for retirement and only two in five have a clear picture of how much they need to save to maintain a desired standard of living in retirement.

Additionally, results from assessments of financial knowledge suggest that many older people may not be well-equipped to handle their finances. When compared to young and middle aged age adults, older adults score the lowest on objective assessments of financial knowledge, yet they rate their financial confidence as the highest of any age group.

The study

This study aims to inform the design and targeting of policy interventions aimed at improving the financial literacy of older people.

The study analyses data from the 2014 Canadian Financial Capability Survey to examine financial knowledge and financial confidence among seniors (aged 65 and over) and near-seniors (aged 55 to 64). It considers how knowledge and confidence are related to three domains of financial behaviour that in turn relate to readiness for retirement: money and debt management, future planning and savings, and best financial practices and protection measures. The study also compares individuals’ financial knowledge levels with their financial confidence assessments and the relationship with individuals’ financial behaviour and decision-making. Methods include dividing the sample into quartiles based on level of knowledge and on level of confidence and constructing a knowledge-confidence gap indicator: highly confident; just confident; under confident. Bivariate and multivariate analyses (regression analysis) are used to investigate relationships between the data and classifications.

Key findings

• People with a high level of financial knowledge are more likely to report effective financial behaviour (most aspects significant at 1% level, i.e. p<0.01)
• A positive self-perception (i.e. financial confidence) is associated with effective financial behaviour (most aspects significant at 1% level, i.e. p<0.01)
• Under-confident seniors and near-seniors perform less well than those who are confident or over-confident in all three behavioural domains examined: money and debt management, future planning and savings, and protection measures.
• High knowledge alone is not enough to lead to financially desirable behaviours, as those with a lack of financial confidence score less well on several measures.
• Confidence seems to contribute to seniors and near-seniors with low knowledge selecting financially desirable behaviours in several key domains: Highly confident individuals who are less knowledgeable are doing well in managing their debt, keeping up with their bills, checking their bank accounts frequently, having some savings or assets, having multiple insurance products, and being better prepared for unexpected changes in financial needs.
• Financial education interventions should seek to enhance not only financial knowledge but also financial confidence, for example by: incorporating critical activities that raise self-awareness of participants’ skills and financial status; and targeting specific needs related to confidence, in order to sufficiently enhance planning and saving habits.

Points to consider

• Methodological limitations:
  • Seniors (65 and over) and near-seniors (55 – 64) are combined into one sample group to provide better statistical power and robustness to the analysis
  • The bivariate analysis reveals that financial decision-making changes with knowledge as well as with confidence, but it appears that some of the observed statistical patterns are caused by spurious correlations due to confounding factors such as demographic differences. This led to use of multivariate modelling which controls for some of these factors and should yield more robust analysis.
• Relevance/generalisability/ transferability/applicability:
  • There may be limits on the extent to which findings can be generalised to the U.K, where the context such as the financial infrastructure and support for financial capability differs.
  • However, as part of the UK Financial Capability Strategy in 2014, a framework developed by Bagwell et al. establishes a link between mindset and financial self-efficacy, with self-confidence in financial skills being equally important, if not more so, than actual financial knowledge in shaping financial capability. This supports the analysis presented in the study.

Full report

The role of financial literacy in financial decisions and retirement planning among seniors and near-seniors