How much do you know about money? According to Ramesh Rao, the answer to that question may hold more weight than one might think, especially when it comes to retirement readiness. Rao, who holds the McDermott Centennial Chair in Banking and Finance and directs the Langston Wealth Management Center at Texas McCombs, has been investigating the deeper psychological aspects of financial behaviour. His latest research suggests that it’s not just what people know about money that matters — it’s what they believe they know that may have a profound influence on whether they feel prepared for retirement.

For years, financial studies have shown that individuals with a greater appetite for financial risk tend to be more confident about their ability to retire comfortably. However, Rao’s research goes a step further by identifying subjective financial knowledge (SFK) as a critical factor in this relationship. SFK refers to a person’s perception of their financial knowledge, not necessarily their actual competence. The findings indicate that individuals with high SFK tend to feel more secure in their financial futures and are more willing to take calculated financial risks — traits strongly associated with better retirement planning outcomes.

This insight represents a significant challenge to the traditional approach to financial education. Most literacy programmes concentrate on teaching concrete skills — understanding compound interest, managing budgets, or navigating retirement accounts like 401(k)s. While these skills are undeniably valuable, Rao argues that they may only be part of the equation. Confidence, or the belief in one’s financial capability, can be just as important in determining behaviour. In his view, it is often the mindset rather than the mastery that influences whether someone begins saving early or delays critical financial decisions.

The urgency of rethinking financial literacy becomes even clearer when considered alongside broader economic trends. Traditional pension schemes are steadily disappearing in many countries, including the United States, and people are living longer than ever. As a result, individuals are increasingly responsible for building and sustaining their retirement funds over extended lifespans. “There’s a major crisis in America,” Rao states plainly. “Traditional pension funds are disappearing, and people are living much longer, and they’re not saving enough for retirement.” In such an environment, psychological readiness — including financial confidence — could be a crucial determinant of long-term security.

To support their findings, Rao and his colleagues — Congrong Ouyang of Texas A&M University and Khurram Naveed of the College for Financial Planning — analysed data from the 2022 Survey of Consumer Finance. Drawing on responses from 3,267 working adults across the United States, they examined how SFK, risk tolerance, and perceived retirement readiness interacted. Participants rated themselves on scales of financial risk tolerance, subjective financial knowledge, and retirement preparedness. Even after controlling for variables such as income, education, and health, the data revealed robust correlations.

The research found that only 35% of respondents felt satisfied or very satisfied with the adequacy of their retirement savings. A higher tolerance for financial risk corresponded to a 0.54-point increase in perceived savings adequacy on a 1-to-5 scale. Most notably, nearly 40% of the connection between risk tolerance and retirement confidence could be explained by SFK. Rao considers this to be an exceptionally robust effect, highlighting the profound impact that self-belief in financial matters can have, particularly for individuals with lower incomes or less formal education. Boosting perceived financial competence, therefore, may offer a more accessible route to retirement preparedness than focusing solely on formal financial training.

The implications of this research are far-reaching. Rao believes that financial education must evolve to address both knowledge and perception. “Our basic idea is that people’s actions are driven by what they believe,” he says. “It shifts the focus from reality to perceptions of reality.” While it remains essential to equip individuals with analytical tools and factual knowledge, it is equally important to nurture their confidence. If people are encouraged to believe they can manage their finances effectively, they may be more likely to take proactive steps toward achieving financial stability. In this light, retirement readiness is not merely a question of numbers — it’s also a matter of mindset.

More information: Ramesh Rao et al, The Impact of Subjective Financial Knowledge on Perceived Retirement Adequacy for US Working Adults, The Journal of Wealth Management. DOI: 10.3905/jwm.2025.1.270

Journal information: The Journal of Wealth Management Provided by University of Texas at Austin