How Ordinary Consumers Make Complex Economic Decisions: Financial Literacy and Retirement Readiness

In this paper we report on several new self-assessed and objective measures of financial literacy obtained using the American Life Panel (ALP); we also link these performance measures to efforts consumers make to plan for retirement. We evaluate the causal relationship between financial literacy and retirement planning by exploiting information about respondents’ financial knowledge acquired in school - before entering the labor market and certainly before starting to plan for retirement. We show that those with more advanced financial knowledge are those more likely to be retirement-ready.