Data and Research June 7, 2018

Continuous Financial Education Improves Retirement Outcomes

A research report says "financial education delivered to employees around the age of 40 will optimally enhance savings at retirement close to 10%. By contrast, programs that provide one-time education can generate short-term but few long-term effects.”

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Financial wellness programs that follow up with participants or that are offered continuously are the most effective, according to a new report, “Assessing the Impact of Financial Education Programs: A Quantitative Model,” issued by the Pension Research Council at The Wharton School at the University of Pennsylvania.

These strategies “help employees retain knowledge acquired via the program,” according to the report. “In this case, financial education delivered to employees around the age of 40 will optimally enhance savings at retirement close to 10%. By contrast, programs that provide one-time education can generate short-term but few long-term effects.”

The council says that interest in financial wellness programs increased after the Great Recession of 2008. However, to date, the council says, little research has been done on the effectiveness of such programs. Additionally, the council says, “estimating the price of acquiring financial knowledge is difficult, as little is known regarding inputs to the production process.”

However, the council says that people between the ages of 40 and 60 are the most likely to participate in workplace financial wellness programs, since this is when they tend to save the most in their working lives.

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“Furthermore, we find that program participation is higher for the better-educated, due to the larger gain in investing in knowledge for these individuals,” the council says. “Conversely, the least educated are less likely to partake of the program offering. The uneducated optimally save less, both as a result of their greater reliance on the social safety net, and their shorter life expectancies.” Additionally, higher-cost financial wellness programs have lower participation rates.

The council found that those who participate in a financial wellness program “have higher earnings, more initial knowledge and more wealth, while nonparticipants are poorer, earn less and have little financial knowledge at baseline. This occurs regardless of the age at which the program is offered.”

The council says it is important to offer financial wellness programs consistently: “After the program expires, we see that those who participate in the program cut back on their investment. Along with the depreciation in financial knowledge, this leads to a dampening of the program’s effect when it is offered. After the initial ramp-up in financial knowledge, the marginal effect on behavior is quite small. The net effect of a one-year program offered at age 30 is quite small, particularly by the time the worker attains age 65. In other words, a one-time financial education program may have little effect, as expected, but the long-term effects of a persistent financial education program can be quite sizable.”

The full report can be downloaded here.
Data and Research June 7, 2018

Most Americans Have Not Figured Out How Much is Needed to Retire

Among those who have made an estimate, the median amount is $650,000, Bankrate.com learned in a survey.

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Sixty-one percent of Americans are unaware of how much savings they will need to successfully retire, Bankrate.com learned in a survey. The median amount among those who have assessed how much they will need is $650,000. Nineteen million Americans say they never plan to retire, including 9% of both Millennials (18- through 37-year-olds) and Baby Boomers (54- through 72-year-olds).

Millennials are the most apt to be unsure of how much money they will need, cited by 69%. However, even older Americans are not in much better shape vis-à-vis retirement estimates: 56% of Generation X (38- through 53-year-olds), 58% of Baby Boomers, and 59% of those 73 and older have no clue.

Among people who have put some thought into the required retirement savings, responses are all over the map, with 7% saying between $250,000 and $500,000. Eight percent each say $250,000 or less, $500,000 to $1 million, or more than $1 million.

Gen Xers are twice as likely as any other age group to say they will need over $1 million to retire. Those who are working are three times as apt to say this, compared with those who are not working. Additionally, people who live in the Northeast (12%) and West (11%) are twice as likely to say $1 million or more than residents of the Midwest (5%) and South (6%).

“The key to retirement savings is to actually save for retirement,” says Bankrate.com analyst Taylor Tepper. “Put away at least 10% of your pay, including any employer contributions, into your retirement account—and do it yesterday. There are pretty sophisticated online calculators and tools that can help you estimate how much you’re going to need, and you can always hire a fee-only certified financial planner if you want a little more hand-holding.”

More than half of Americans say they have sought advice on retirement planning. Twenty-six percent consulted a personal financial adviser, and 21% asked a family member or friend. Eleven percent used an online retirement calculator, 10% reached out to a bank or financial institution, 8% relied on expert commentary or articles, and less than 1% used a robo-adviser.

Millennials are the most apt to reach out to a family member or friend (30%), while Boomers are the most apt to work with an adviser (37%). People who are married or living with a partner are twice as likely to consult a personal financial adviser or financial institution than those who are single or living alone.

Asked how much of their retirement would be funded by Social Security, 61% said little to none, 20% said half, and 17% said most of their income would be from Social Security. “Social Security will almost certainly contribute a sizable portion of your retirement income, even for Millennials, despite erroneous declarations that the pension program will soon go bankrupt,” Taylor says.

GfK Custom Research North America conducted the survey among 1,000 adults for Bankrate.com in May. The survey can be viewed here.

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