Exploring the Demand for Retirement Planning Advice: The Role of Financial Literacy

By Seay, Martin C.; Kim, Kyoung Tae et al. | Financial Services Review, Winter 2016 | Go to article overview

Exploring the Demand for Retirement Planning Advice: The Role of Financial Literacy


Seay, Martin C., Kim, Kyoung Tae, Heckman, Stuart J., Financial Services Review


(ProQuest: ... denotes formulae omitted.)

1.Introduction

U.S. workers face significant difficulty in adequately planning for retirement. This difficulty is reinforced by the transition from defined benefit (DB) to defined contribution (DC) plans, which places more responsibility and risk on individuals for their saving and investing decisions. Planning for retirement requires individuals to make complex financial decisions, with financial literacy becoming critical (Lusardi and Mitchell, 2007; Van Rooij, Lusardi, and Alessie, 2011). The shift to self-funding retirement (i.e., DC plans) has helped spur the growth in demand for financial advice and the financial planning profession. While some research has investigated the relationship between individual financial literacy and general financial advice seeking behavior (Calcagno and Monticone, 2015; Collins, 2012; Moulton, Loibl, Samak, and Collins, 2013; Robb, Babiarz, and Woodyard, 2012), little work has focused on advice related to retirement planning. Further, there are notable limitations in the measures used in previous research, either because of temporal inconsistencies (e.g., the National Financial Capability Survey has a five-year look back) or lack of focus on retirement planning. Consequently, this study uses data from the 2010 and 2012 administrations of the National Longitudinal Survey of Youth 1979 (NLSY79) to investigate the relationship between financial literacy and household demands for retirement planning advice.

Recent retirement adequacy studies have found that more than half of U.S. households are not adequately prepared for retirement. Using data from the 2010 Survey of Consumer Finances (SCF), Kim and Hanna (2015) find only 42% of working households aged 35 to 60 are adequately prepared for retirement, while 46% report that they expect to receive adequate income in retirement. Munnell, Webb, and Golub-Sass (2012) note an increase in the proportion of working households who are at risk of being unable to maintain their preretirement standard of living in retirement between 2007 and 2010 from 44% to 53%. This increase is attributed to the combined effect of poor investment returns, lower interest rates, and the increase in Social Security's Full Retirement Age. Despite positive signs of economic recovery, Munnell, Hou, and Webb (2014) find that 53% of households remain at risk of lowered standards of living in retirement using data from the 2013 SCF.

A growing body of literature indicates that financial planners provide significant benefits, both economic and psychological, in helping individuals prepare for retirement. Two key studies investigating the economic benefit of financial advice are Blanchett and Kaplan (2013) and Grable and Chatterjee (2014). Blanchett and Kaplan (2013) quantify the benefit of retirement planning advice as gamma, a measure of the increased potential retirement income an individual receives from working with an advisor. Their work suggests that, through managing investments, taxes, and retirement withdrawals, an individual's retirement income can be increased by 22.6% by working with an advisor. Similarly, Grable and Chatterjee (2014) introduce zeta, a measure of how a financial advice can limit wealth volatility and loss in times of economic turmoil. They find that individuals who met with a financial advisor experienced significantly less wealth volatility over the Great Recession. In terms of psychological benefits, individuals who meet with a financial advisor are more likely to establish long-term goals and be confident in their retirement plan (Marsden, Zick, and Mayer, 2011). Further, households who receive financial planning advice exhibit greater consistency between risk attitudes and financial behaviors (Park and Yao, 2015).

Given the important role that financial literary and financial planners play in retirement planning, the current study extends previous literature in three ways. First, the NLSY79 provides a specific measure of financial planner use for retirement planning. …

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