Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Page 35 Page 36 Page 37 Page 38 Page 39 Page 40 Page 41 Page 42 Page 43 Page 44 Page 45 Page 46 Page 47 Page 48 Page 49 Page 50 Page 51 Page 52 Page 53 Page 54 Page 55 Page 56 Page 57 Page 58 Page 59 Page 60 Page 61 Page 62 Page 63 Page 64 Page 65 Page 66 Page 67 Page 68 Page 69 Page 70 Page 71 Page 72 Page 73 Page 74 Page 75 Page 76 Page 77 Page 78 Page 79 Page 80 Page 81 Page 82 Page 83 Page 84 Page 85 Page 86 Page 87 Page 88 Page 89 Page 90 Page 91 Page 92 Page 93 Page 94 Page 95 Page 96 Page 97 Page 98 Page 99 Page 100 Page 101 Page 102 Page 103 Page 104 Page 105 Page 106 Page 107 Page 108Measuring Financial Literacy HRS attempts to measure basic financial concepts akin to the notions of the rudimentary ABCs for reading literacy. Three economic concepts that individuals should have some understanding of are measured: interest compounding, inflation, and risk diversification. The following three questions have become the benchmark by which a wide variety of analysts measure financial literacy: ? 59 CHAPTER 3 | ECONOMIC PREPAR ATION FOR RETIREMENT Financial Literacy • Suppose you have $100 in a savings account and the interest rate is 2% per year. After five years, how much do you think you will have in the account if you left the money to grow: more than $102, exactly $102, or less than $102? • Imagine that the interest rate on your savings account is 1% per year and inflation is 2% per year. After one year, will you be able to buy more than, exactly the same as, or less than today with the money in this account? • Is the following statement true or false?“ Buying a single company stock usually provides a safer return than a stock mutual fund.” answers: more than $102; less than; false as well. Individuals who report in 1992 that they had discussed retirement with their spouses and had some type of tax-deferred retirement plan are more satisfied with life in 2004, even after accounting for health status, reason for retiring, and income (Noone et al. 2009). The 2008 Financial Sophistication and Investment Decision- making module collects information about knowledge of capital markets, risk diversification, fees, financial savvy/numeracy, and attitudes toward investing and risk (Lusardi et al. 2013). The overall level of financial sophistication is found to be fairly low. However, knowledge of risk diversification is fairly high. Over 60% of HRS participants understand that it is better to invest in more rather than fewer stocks and mutual funds. More than 60% know that fees are important to consider when investing long-term in mutual funds. Nonetheless, only around 25% of respondents overall can be considered financially sophisticated. Concern may be especially warranted for some groups. Lusardi and Mitchell (2014) show that women report less understanding of the stock market than men and are less knowledgeable about risk diversification. It may be that some of this gender difference reflects higher risk aversion among women. Level of formal educa- tion is important as well. Knowledge of asset pricing is fairly low among those with less than a high-school education, but better for those with a college degree. Older people also demonstrate less fi- nancial sophistication. African American and Hispanic participants demonstrate lower levels of financial sophistication generally. Lack of financial literacy has serious implications for the amount of con- sumer debt. Accounting for differences in financial sophistication overall, those with little understanding of borrowing and financial debt have higher debt loads (Lusardi and Tufano 2015). Those with greater financial literacy are more likely to say they have thought about retirement and hold higher levels of wealth.