The Role of Financial Literacy in Determining Retirement Plans by Robert Clark Melinda Sandler Morrill and Steven G. Allen is the latest publication in the National Bureau of Economic Research’s Working Papers series. Based on responses from more than 1500 workers nearing retirement at three large U.S. companies the researchers arrive at a sobering conclusion. They state “Although retirement-related decisions will affect workers’ well-being for the remainder of their lifetimes many do not possess enough basic financial knowledge to confidently make optimal choices.”
Just where do the employees fall short? While nearly all of the workers surveyed were covered by defined benefit pension plans 56% didn’t know what their pension would be once they retired. And when asked about national retirement programs like Social Security or Medicare workers got only 50% of the answers correct. Alarming just 37% knew 66 was the age that they could retire with full benefits.
Make this year the year you take maximum advantage of your retirement plan at work. Contribute all you can to your 401(k) at least enough to qualify for any company matching funds. If you receive a raise increase your contributions. This year’s plan limits are $16500 or $22000 if you’re over age 50. If you are self-employed or have self-employment income from consulting work or a hobby there are additional retirement savings vehicles you can use including Individual 401(k) plans SEP-IRAs SIMPLE IRAs or Keoghs.
You should also consult with an independent financial advisor if you have questions about your retirement plan.