Financial Literacy, Retirement Planning and Household Wealth

October 12, 2011

There is ample empirical evidence documenting widespread financial illiteracy and limited pension knowledge.  At the same time, the distribution of wealth is widely dispersed and many workers arrive on the verge of retirement with few or no personal assets.  In a new paper, researchers Maarten van Rooij, Annamaria Lusardi and Rob J. Alessie investigate the relationship between financial literacy and household net worth, relying on comprehensive measures of financial knowledge designed for a special module of the Dutch Central Bank Household Survey (DHS).

  • Their findings provide evidence of a strong positive association between financial literacy and net worth, even after controlling for many determinants of wealth.
  • Moreover, they discuss two channels through which financial literacy might facilitate wealth accumulation.
  • First, financial knowledge increases the likelihood of investing in the stock market, allowing individuals to benefit from the equity premium.
  • Second, financial literacy is positively related to retirement planning, and the development of a savings plan has been shown to boost wealth.

Overall, financial literacy, both directly and indirectly, is found to have a strong link to household wealth.

Source: Maarten van Rooij, Annamaria Lusardi and Rob J. Alessie, "Financial Literacy, Retirement Planning and Household Wealth," National Bureau of Economic Research, August 2011.

For text:

http://www.nber.org/papers/w17339

 

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