Sunday, December 27, 2015
Sunday, November 29, 2015
Friday, November 27, 2015
Sunday, June 21, 2015
What advice do you wish you had—or had not—gotten about your finances after graduating from college?
For everyone, the memories of life after college are a mix of excitement and trepidation about what is coming next. For me it was also a transition year, as I had some teaching and research assistant work while applying to graduate school. Realizing now how important a time that was to think about finances, my first wish would have been for some advice! As a major in economics, I knew about Edgeworth box and Pareto efficiency, but not much about how to manage my (little) money. My parents thought an education from the best private college in Italy would provide the skills a young person needed to navigate today’s economy, but they never checked.
In my case, three things were needed. First, I had to figure out how much to save in order to retire at a target date. That required calculations, not just relying on the gut feeling about saving I had used after college and graduate school. Second, I needed a proper allocation of those savings. It was inefficient to save without taking advantage of tax-favored vehicles, such as Supplementary Retirement Accounts and IRAs, or to invest in managed funds that generated dividends and charged high fees. Third, I needed a system to keep myself on track and to evaluate how well I was doing. Even though I came late to understanding these future-planning requirements, the changes are paying off. Empirically, it turns out that those who plan for retirement end up with about three times the wealth of those who do not plan.
Thursday, June 11, 2015
As employers continue shifting pension responsibilities to workers, a new question has surfaced: Should employees take their pensions as annuities or lump sums? Workers with defined contribution pensions will have to decide this, and employees with defined benefit pensions are increasingly given this choice too, as firms try, for example, to reduce oversized plan liabilities.
Monday, June 1, 2015
What information do participants need to make informed decisions in pension risk-transfer transactions?
Thank you for inviting me to testify about information that participants need to make informed decisions in pension risk-transfer transactions. This is an important issue, and I am grateful for the opportunity to testify. My name is Annamaria Lusardi and I am the Denit Trust Chair of Economics and Accountancy at the George Washington University School of Business and the founder and academic director of the Global Financial Literacy Excellence Center (GFLEC).
Wednesday, May 13, 2015
Starting out as an assistant professor more than 20 years ago was truly exciting, even though the move was full of problems and it took months to settle into a new place. The day I showed up in the Human Resources office to enroll in health and pension plans, I was handed a bunch of brochures and asked to fill out a stack of forms. I spent most of the time focused on the health plans and their varied coverage.
Sunday, April 19, 2015
Over the last 40 years, we as individuals have been given increasing responsibility for ensuring our own financial well-being in retirement. But it’s gotten quite complex, with an alphabet soup of retirement saving vehicles – from 401(k) to 403(b) plans to IRA and Roth IRAs – and our responsibilities loom large. Not only must we figure out how much to save and how to invest our retirement assets, but we also must take advantage of a variety of tax-favored assets, employer matches, payout options, and much more.
In my research, I investigate how well-equipped we are to make such complex financial decisions. For instance, how much do we know about the power of compound interest, so we can appreciate how critical it is to save early and grow our money tax free? Do we know how to diversify risk? Such knowledge provides a firm foundation for good financial decision-making over the entire lifetime.
To gain an understanding of the level of financial literacy in the population, Olivia S. Mitchell and I designed and fielded three key questions which have now been used in a large number of national and international surveys. We have also administered the survey to a variety of employees at large companies, to see exactly what they know – and don’t know.
Try the quiz yourself (right answers are in bold)
Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
More than $102
Less than $102
Do not know
Refuse to answer
Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?
More than today
Exactly the same
Less than today
Do not know
Refuse to answer
3. The Risk Diversification question
Please tell me whether this statement is true or false: “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”
Do not know
Refuse to answer
Our findings in the US and around the world proved to be shocking! Only one-third of Americans can answer all three questions correctly. And while one might expect that the more experienced would be substantially more financial literate, this is not the case. In fact, older adults are not much savvier than the young, despite their having had to make many financial decisions including about retirement savings. We also find that financial illiteracy is particularly severe among certain demographic groups, such as the low paid, women, and young adults. Moreover, when we take our financial literacy survey abroad, the results are not much better! Respondents in Australia and Germany do perform better, while thus far we see respondents in Eastern Europe and Russia are the least financially savvy. But all of us have a long way to go.
I worry a great deal about such low levels of financial literacy, because retirement planning requires a modicum of financial sophistication -- and planning is a strong predictor of retirement wealth. According to our research, those who plan accumulate up to three times the amount of wealth of non-planners. The data shows the link to financial literacy is very strong; it is those who are financially literate that plan for retirement. And without basic financial skills, people get into trouble young, taking out payday loans and overdrawing their credit cards, and they stay in trouble later, by failing to pay down their mortgages and borrowing against their retirement accounts.
Granted, raising our nation’s financial savvy will require costs and effort. Nevertheless, there are costs of ignorance, including not saving, not being able to retire, and being poor during one’s later years.
Saturday, April 18, 2015
Saturday, January 10, 2015
As in my previous post, I would like to continue to reflect on highlights from last year. One of the advantages of founding and directing a global center is that I get to travel a lot. In the Fall 2014, I travelled to seven countries on two continents. I cannot tell you how much I have enjoyed it, even though I had little time to do anything else, including write my blog.