Recent research finds that Americans who claim they will “never retire” are more likely to lack financial knowledge.

The evidence from a national survey is alarming: 20% of respondents who answered all financial literacy questions incorrectly expected to work indefinitely, compared to only 12% of those who answered correctly and anticipated working past the usual retirement age. This survey underscores the pressing need to address the troubling correlation between poor financial literacy and retirement expectations.

Additionally, the research identified a significant link between overconfidence in financial understanding and the assertion of never retiring. Those who overestimated their financial acumen and those whose lack of confidence accurately reflected their poor financial knowledge were more prone to declare they would never retire. Sherman Hanna, a co-author of the study and professor of consumer sciences at Ohio State University, pointed out that many individuals who say they will never stop working may not do so out of a passion for their jobs. Instead, their assertion might stem from an inadequate preparation for retirement, masked by a lack of financial literacy.

“If you’re not knowledgeable about finances, it suggests that you don’t know what your financial situation is, and you may have no idea when you can retire,” Hanna explained. He suggested that for some, saying they will never retire could be an admission of their failure to prepare adequately for their later years.

These findings, recently published in the journal Financial Services Review, have profound implications for assessing Americans’ readiness for retirement. Many analyses project retirement adequacy among American workers, assuming that those who say they will permanently retire will continue working around 70. However, Hanna’s previous research indicates that many will likely exit the workforce much earlier than anticipated, potentially ceasing to earn a stable income before sufficiently securing their financial futures.

“This could mean that our projections of the proportion of workers on track for an adequate retirement might be too optimistic,” Hanna remarked, suggesting a potential overestimation in current retirement preparedness models.

The data for this study was derived from the 2016 and 2019 Surveys of Consumer Finances, sponsored by the U.S. Federal Reserve Board. These surveys focused on households where the primary earners were aged between 35 and 60 and employed full-time. These surveys assess financial literacy through three critical questions—often referred to as the “Big Three” — that cover compound interest, real rates of return, and risk diversification.

The findings were clear: the more questions participants answered incorrectly, the more likely they were to expect never to retire. Additionally, the survey asked participants to rate their financial knowledge on a scale from 0 (no knowledge) to 10 (high knowledge). It was found that 30% of those who self-rated their financial knowledge as low (0-2) expected never to retire—more than double the rate among those who considered themselves highly knowledgeable (levels 9 and 10).

This study also examined participants’ financial confidence by comparing their subjective financial knowledge ratings against their actual performance on the literacy questions. It was observed that 17% of those overconfident about their financial knowledge expected never to retire, a higher rate than those with an appropriately high confidence level.

The implications for financial planners, counsellors, and educators are significant, but there is also room for improvement. Hanna stressed the importance of a precise understanding of what it means when individuals claim they expect to never retire. He advocated for a careful evaluation of these individuals’ financial literacy and confidence to assist them in planning effectively for their post-working life, underscoring the potential for targeted financial education and planning support to make a positive impact on these concerns.

More information: Zezhong Zhang et al, The Effect of Financial Knowledge on Workers’ Expectation of Never Retiring, Financial Services Review. DOI: 10.61190/fsr.v32i3.3584

Journal information: Financial Services Review Provided by Ohio State University