b'CHAPTER 3 | ECONOMIC PREPARATION FOR RETIREMENTas well. Individuals who report in 1992 that they had discussedMeasuring Financial Literacy ?retirement with their spouses and had some type of tax-deferredHRS attempts to measure basic financialretirement plan are more satisfied with life in 2004, even after accounting for health status, reason for retiring, and income concepts akin to the notions of the rudimentary (Noone et al. 2009).ABCs for reading literacy. Three economic The 2008 Financial Sophistication and Investment Decision-making module collects information about knowledge of capitalconcepts that individuals should have some markets, risk diversification, fees, financial savvy/numeracy,understanding of are measured: interest and attitudes toward investing and risk (Lusardi et al. 2013). Thecompounding, inflation, and risk diversification. overall level of financial sophistication is found to be fairly low. However, knowledge of risk diversification is fairly high. Over 60%The following three questions have become the of HRS participants understand that it is better to invest in morebenchmark by which a wide variety of analysts rather than fewer stocks and mutual funds. More than 60% know that fees are important to consider when investing long-termmeasure financial literacy:in mutual funds. Nonetheless, only around 25% of respondents overall can be considered financially sophisticated.Financial LiteracyThose with greater financial literacy areSuppose you have $100 in a savings more likely to say they have thought aboutaccount and the interest rate is 2% per year. After five years, how much do you retirement and hold higher levels of wealth. think you will have in the account if you left the money to grow: more than Concern may be especially warranted for some groups. Lusardi$102, exactly $102, or less than $102?and Mitchell (2014) show that women report less understandingImagine that the interest rate on your of the stock market than men and are less knowledgeable aboutsavings account is 1% per year and risk diversification. It may be that some of this gender differenceinflation is 2% per year. After one year, reflects higher risk aversion among women. Level of formal educa- will you be able to buy more than, tion is important as well. Knowledge of asset pricing is fairly lowexactly the same as, or less than today among those with less than a high-school education, but better forwith the money in this account? those with a college degree. Older people also demonstrate less fi-Is the following statement true or nancial sophistication. African American and Hispanic participants false? Buying a single company demonstrate lower levels of financial sophistication generally. Lack stock usually provides a safer return of financial literacy has serious implications for the amount of con-sumer debt. Accounting for differences in financial sophisticationthan a stock mutual fund.overall, those with little understanding of borrowing and financialanswers: more than $102; less than; falsedebt have higher debt loads (Lusardi and Tufano 2015). 59'