AUTHOR: – ROHIT VASANT SANGLE.
ROLL NO: – 118
KOHINOOR BUSINESS SCHOOL.
Financial Literacy and Retirement Planning in Malaysia
Yap Peng Lok , Wei Ying and others (2017) Represents This research explores the relationship between financial literacy and retirement planning in Malaysia. Previous studies, such as those by Lusardi and Mitchell (2011), show that financial illiteracy significantly hinders retirement savings, particularly among women, minorities, and the less educated. Financially savvy individuals are more likely to engage in retirement planning through formal methods. In Malaysia, studies like Chan et al. (2010) reveal that EPF savings are insufficient for many retirees, often running out within three years. The research aims to investigate how financial literacy affects wealth accumulation and retirement planning in Malaysia. It aims to offer policy recommendations to enhance financial literacy, promote private retirement savings, and reduce the reliance on government welfare for senior citizens. The findings of this study could guide policy makers in creating initiatives that improve financial education across various demographics in Malaysia.
The Impact of Cognitive Costs on Retirement Savings
Sulka, Tomasz, (2022) Represents This paper looks at why many people struggle with retirement planning. It suggests that two key factors affect saving: making a plan and sticking to it. Planning requires effort and knowledge, while following through needs self-control. The study proposes that the mental effort involved in planning causes some people to avoid it, leading to low retirement savings. It also discusses how automatic enrollment in pension plans helps people save by removing the decision-making process, but may not always lead to higher savings. The findings help explain why some people, especially those with low incomes, fail to save for retirement and offer policy insights for improving savings behavior.
The Role of Financial Literacy in New Zealand’s Retirement Planning
Crossan & Feslier & others (2011) Represents This paper examines the significance of financial literacy in New Zealand, particularly after the 2007 economic recession. The recession led to a decline in consumer trust in the financial sector, highlighting the need for better financial education. New Zealand’s public pension system, which provides a universal flat-rate pension, reduces the immediate need for private savings but raises concerns about its long-term sustainability. As KiwiSaver grows, financial literacy becomes more crucial for effective retirement planning. The study compares financial literacy in New Zealand with other countries and looks into how financial knowledge influences retirement savings, particularly focusing on Māori communities and the development of targeted financial education programs.
The Role of Financial Literacy in Retirement Wealth Accumulation
Lusardi, Annamaria , Mitchell and others (2006) Represents This paper examines how financial literacy impacts retirement planning and wealth accumulation. It uses data from the Health and Retirement Study (HRS) to compare the wealth of Baby Boomers nearing retirement to that of earlier cohorts. The study finds that, while the median Boomer has more wealth than the previous generation, those in the lowest wealth quartile are worse off. Financial literacy is shown to influence planning behavior, with more financially knowledgeable individuals being more likely to plan for retirement. Moreover, planning is associated with higher wealth accumulation, even after considering demographic factors. The paper highlights the importance of financial literacy and planning in determining retirement preparedness and wealth levels.
Evaluating Risks in Retirement Saving
Poterba , Rauh & others (2005) Represents This paper looks at how the shift from traditional pension plans to 401(k) plans affects retirement savings. It compares different investment strategies, such as investing in stocks, bonds, or a mix of both, to see which is best for building wealth. The study uses data from households to show how investment choices impact retirement wealth and the risks involved. The findings highlight that having wealth outside the 401(k), like Social Security or other savings, plays a big role in retirement outcomes. The paper suggests that both the amount of wealth saved and the risks of different investments should be considered when planning for retirement.
Managing Retirement Savings and Risk
Bohn, (2001) Represents This paper discusses how the aging population and rising life expectancy are increasing the cost of publicly funded retirement systems. As government pensions become more expensive, individuals will need to rely more on private savings. The paper explores the optimal composition of retirement savings and the role of government fiscal policy in managing risks across generations. It examines how government debt and pension policies, such as defined contributions versus defined benefits, affect risk-sharing. The paper argues that public pensions with wage-indexed benefits offer better risk-sharing than privatization. It also discusses the role of capital income taxes and how they can support savings and risk sharing without discouraging saving behavior.
The Role of Financial Advice in Effective Retirement Planning
Lortie, (2016) Represents This paper explores the role of financial advice in helping individuals accumulate wealth for retirement. It argues that sound financial advice, whether commission-based or fee-based, contributes to better financial habits, greater empowerment, and better retirement outcomes. The paper critiques recent regulatory changes aimed at unbundling financial advice from products, suggesting that such measures may have unintended negative consequences. It emphasizes that financial advice should be affordable, competent, and accessible to a broader population, as it plays a crucial role in long-term wealth accumulation. The paper concludes by highlighting the importance of ensuring that financial advice standards and regulatory policies support the financial autonomy of individuals, helping them make informed saving and investment decisions.
Global Retirement Savings Crisis and India’s Challenges
Khedekar & Kulkarni, (2018) Represents Retirement savings are a growing issue worldwide, with a projected USD 400 trillion shortfall by 2050. Many countries, including the U.S., UK, and India, are facing retirement saving crises. In India, a significant number of workers are unprepared for retirement, with limited government pension schemes available. The National Pension Scheme (NPS), Public Provident Fund (PPF), and Employee Provident Fund (EPF) are the main options, but they do not fully address the problem. Studies suggest that understanding factors influencing savings behavior can help improve retirement planning and encourage better saving habits. There is a growing global concern about retirement savings, with an estimated USD 400 trillion shortfall by 2050. The U.S., China, and India are among the countries facing significant retirement savings deficits, with millions of people unprepared for post-retirement financial security. In India, 54% of employees worry about their future financial condition, and most employees will need to work into their sixties to meet their financial obligations.
Wealth Drawdown in Retirement
Poterba , Venti & others , (2011) Represents As baby boomers enter retirement, the focus has shifted to how they will manage their wealth after years of saving. Retired households rely on annuity income from sources like Social Security and pensions, but many also have accumulated wealth in the form of home equity and retirement accounts. However, a significant portion of retirees has limited financial assets outside their retirement savings. Even if retirees use all their assets to buy annuities, many would only see a modest increase in their income. Housing equity is often kept as a safety net, drawn on only when facing unexpected events, like health issues or the death of a spouse, offering protection against the risk of outliving their savings.
Factors Influencing Retirement Timing
Kluth, Sebastian,(2014) Represents Retirement behavior is influenced by economic, sociological, and personal factors. Economically, the life cycle model suggests that individuals plan to save more during high-income years to consume more in retirement. Pension benefits and social security impact the decision, with higher benefits encouraging earlier retirement. However, time preferences, such as individual discount rates, play a role in deciding when to retire. Sociologically, push factors (e.g., poor health) and pull factors (e.g., leisure) influence decisions. Subjective life expectancy affects retirement intentions, but actuarial reduction rates (penalties for early retirement) are key. Marital status also plays a role, as couples’ decisions often align. Overall, a mix of personal preferences, external factors, and pension rules shape retirement behavior.
Conclusion: –
In conclusion, financial planning and literacy are fundamental to ensuring adequate retirement savings across different populations and nations. The research demonstrates that financial illiteracy, cognitive costs, and a lack of proper planning significantly impede individuals’ ability to save for retirement, leading to insufficient savings and increased reliance on government welfare systems. Studies in countries like Malaysia, New Zealand, and India highlight the need for stronger financial education initiatives and access to sound financial advice, which are crucial for improving retirement preparedness, especially among vulnerable and underserved groups.
As pension systems shift from traditional models to privatized options, individuals face greater risks and complexities in managing their retirement savings. The aging population and longer life expectancy further strain public pension systems, underscoring the importance of private savings. Financial literacy becomes even more critical to navigating investment choices and planning effectively.
To address the growing global retirement savings crisis, policymakers must prioritize financial education, improve access to financial advice, and create policies that support sustainable retirement planning. By equipping individuals with the necessary tools and knowledge, societies can work toward reducing retirement insecurity and ensuring that future generations are financially prepared for retirement. Ultimately, a comprehensive approach combining financial literacy, effective planning, and robust retirement systems will be key to achieving long-term financial security for all.
References: –
Ashlesha Khedekar-Swaminathan & Savita Kulkarni, 2018. “Behavioral Challenges for Retirement Planning: A Study of Employees of the Information Technology Industry in Pune, Maharashtra,” International Journal of Applied Behavioral Economics (IJABE), IGI Global, vol. 7(2), pages 15-29, April.
Diana Crossan & David Feslier & Roger Hurnard, 2011. “Financial Literacy and Retirement Planning in New Zealand,” CeRP Working Papers 113, Center for Research on Pensions and Welfare Policies, Turin (Italy).
Henning Bohn, 2001. “Retirement Savings in an Aging Society: A Case for Innovative Government Debt Management,” CESifo Working Paper Series 494, CESifo.
James M. Poterba & Joshua Rauh & Steven F. Venti, 2005. “Utility Evaluation of Risk in Retirement Saving Accounts,” NBER Chapters, in: Analyses in the Economics of Aging, pages 13-58, National Bureau of Economic Research, Inc.
James Poterba & Steven Venti & David Wise, 2011. “The Composition and Drawdown of Wealth in Retirement,” Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 95-118, Fall.
Kluth, Sebastian, 2014. “Should I Stay or Should I Go? The Role of Actuarial Reduction Rates in Individual Retirement Planning in Germany,” VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100413, Verein für Sociopolitical / German Economic Association.
Lusardi, Annamaria & Mitchell, Olivia S., 2006. “Baby boomer retirement security: The roles of planning, financial literacy, and Housing wealth,” CFS Working Paper Series 2006/20, Center for Financial Studies (CFS).
Pierre Lortie, 2016. “A Major Setback for Retirement Savings: Changing how Financial Advisers are Compensated could Hurt Less-Than-Wealthy Investors Most,” SPP Research Papers, The School of Public Policy, University of Calgary, vol. 9(13), April.
Stanley Yap Peng Lok & Chong Wei Ying & Leow Hon Wei, 2017. “A Framework for Retirement Planning Based on Financial Literacy and Wealth Accumulation,” Proceedings of Business and Management Conferences 5607977, International Institute of Social and Economic Sciences.
Sulka, Tomasz, 2022. “Planning and saving for retirement,” DICE Discussion Papers 384, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).