State “Capital”

I recently had the opportunity to attend The National Financial Capability Study Roundtable, where a variety of researchers (including EBRI’s Sudipto Banerjee) presented, discussed, and challenged a variety of research papers on topics ranging from financial literacy and retirement planning to financial advice, and from financial literacy and financial behavior to “Prohibition, Price Caps and Disclosure”.  Taken as a whole, the day’s discussions focused on ways to better understand and measure the factors that appear to influence individual behaviors regarding their finances. 

Simply stated, financial literacy is generally described as the ability to understand finance.  More recently, some have begun to focus on financial capability1.  Research has shown that people with higher levels of financial literacy approach retirement with much higher levels of wealth.  However, a growing body of research also suggests that most Americans have limited knowledge about concepts such as inflation, compound interest, and risk diversification at a time when they face an increasingly complex financial planning process alongside an expanding set of saving, investment, and decumulation options. 
Drawing on data from the National Financial Capability Study (NFCS)2, designed by the FINRA Investor Education Foundation (an ASEC member firm), Dr. Banerjee’s report3 noted that the chances of having a bad financial behavior decreases with age, and that the chances of exhibiting a bad financial behavior go down with education and income.  Interestingly enough, full-time and part-time workers, homemakers, sick or disabled, and unemployed or laid-off individuals were all more likely to have bad financial behavior than self-employed people. 
That said, the report specifically examined the role of where you live – specifically the state in which individuals live – in explaining financial literacy and behavior. It also ranked all U.S. states in terms of financial literacy and financial behavior of its residents.
Financial literacy and financial behavior are strongly associated with an individual’s age, income, education and other demographic characteristics.  The study shows that, after controlling for the effect of these individual demographic characteristics, most bottom-ranked states had a statistically significant effect on their residents’ financial literacy and almost all states have a statistically significant effect on their residents’ financial behavior.  However, the chance of exhibiting “worse” financial behavior increased as the financial behavior ranking dropped.
According to the report, this suggests that there might be factors shaping individual financial literacy and behavior other than individual demographic characteristics – and they might be influenced by the state in which people live.
-          Nevin E. Adams, JD

1  The National Financial Capability Study identifies four key components of financial capability as (1) making ends meet, (2) planning ahead, (3) managing financial products, and (4) financial knowledge and decision-making.  See http://www.finrafoundation.org/web/groups/foundation/@foundation/documents/foundation/p120535.pdf   
2 The National Financial Capability Study is available online at http://www.finrafoundation.org/programs/p123306
3 Banerjee’s paper, including the state rankings, is online at https://custom.cvent.com/09056B0B33C34EC2BECC8C4A235B766F/files/event/51EB0D7B12344774B422F6A615E9B8B9/0c08c7cd98d74c01bf954ad368275ff4.pdf. 

See also “How Do Financial Literacy and Financial Behavior Vary by State?” in EBRI Notes, November 2011 at http://www.ebri.org/publications/notes/index.cfm?fa=notesDisp&content_id=4936 

 

Comments

Post a Comment

Popular posts from this blog

Do Roth and 401(k) Pre-Tax Holders Really Spend Differently?

Image
An interesting—and somewhat counterintuitive—report came out last week, one that cast doubt on the “common wisdom” regarding Roth versus traditional pre-tax savings. The assumption underlying the research [i] was that those who had not yet paid taxes on their savings (the traditional pre-tax savings) would be hesitant to tap into those savings and trigger taxes, certainly more so that individuals that had already paid those taxes. Instead, the research suggested that the opposite occurred; that individuals who had saved on a pre-tax basis actually withdrew more/sooner—but with a twist.  This they hailed as good news. They noted that the research suggests investing in a CT (current-taxed, or Roth) plan could help ease concerns about outliving funds—because they spend at a lower rate (though they saw this as a negative for those who saved on a deferred tax (DT) basis).  They even managed to find a silver lining in the “cloud” of faster spending by the pre-tax crowd beca
Read more

Is the 401(k) Really a ‘Horrible’ Retirement Plan?

Image
  A recent “news” post about a blog post finds some curious “faults” with the 401(k). The news item carried the provocative title “ ‘Rich Dad’ Robert Kiyosaki Reveals Why the 401(k) Is a ‘Horrible’ Retirement Plan .” It originally ran on GoBankingRates.com, but was subsequently picked up in syndication on Yahoo Finance (at least). For the uninitiated, Robert Kiyosaki is one of those “I’ll help you get rich the way I did” types, providing that road map via books (notably “Rich Dad, Poor Dad”) and seminars. He offers comparisons to decisions made by his dad (poor dad) in contrast to those of the father of his best friend (rich dad).  Suffice it to say that his dad worked hard and saved the old-fashioned way—which is NOT his advice to you. That’s included previous pearls of wisdom like “ Why Saving Money is the Wrong Way to Prepare for Retirement .” Apparently rather than saving for retirement, we’re supposed to “look for an investment that will pay for your desired standard of living. Ma
Read more

Shifting the 401(k) ‘Balance’?

Image
A week or so ago, I came across an announcement that IBM was making changes to its 401(k). More specifically that, effective next year they were going to replace their matching contribution in their 401(k) with an employer contribution to a cash balance plan. [i] In the days that followed, the news was picked up in a couple of different trade publications—the implication being that this might be signs of a new shift in plan design. Heck, even Teresa Ghilarducci weighed in , championing the “evolution” to a defined benefit structure from the “flawed” 401(k). She never misses an “opportunity.” Readers here are likely familiar with the basic concepts of a cash balance design. Technically a defined benefit plan, it’s generally referred to as a “hybrid” because it also has a number of participant-friendly aspects that it shares with a defined contribution plan, notably an account balance (though it’s a “notional” one) that is shared with participants. The benefits accumulate
Read more