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In 2004, researchers Annamarie Lusardi and Olivia Mitchell included three questions on financial literacy in the national Health and Retirement Study (HRS) with the intention of measuring the financial knowledge of respondents and their spouses (ages 50+). The financial literacy questions that were featured on the survey are provided below.
1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
A. more than $102
B. exactly $102
C. less than $102
2. Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After 1 year, would you be able to buy _____ today with the money in this account?
A. more than
B. exactly the same as
C. less than
3. Do you think that the following statement is TRUE or FALSE?
Buying a single company stock usually provides a safer return than a stock mutual fund.
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Source: Lusardi and Mitchell, 2006
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Correct Answers: 1. A; 2. C; 3. False
Lusardi and Mitchell found that financial illiteracy is widespread among older Americans. Only 29 percent of all respondents could correctly answer all three financial questions. Less than half of all respondents could answer both the interest and inflation questions correctly. When they analyzed the results according to ethnicity, education, and gender, Lusardi and Mitchell found that less than half of Hispanics answered question number one correctly and were the least likely of all ethnic groups to answer question number two correctly. Only 37 percent of African-American respondents answered question number three correctly. Those with a college degree displayed the highest proportion of correct answers for question number three. They also found that female respondents were approximately 10 percentage points less likely than males to answer questions one and two correctly.
For the 2008 HRS, Lusardi, Mitchell and Vilsa Curto expanded the financial literacy topics discussed and changed the questions' wording to range from plain to technical language. They found that financial knowledge was limited to one concept, and that when asked several questions on one topic, less than 25 percent of respondents displayed "sophistication" in terms of overall concept knowledge. For example, when respondents were asked three questions regarding stock diversification, only 32 percent answered all three questions correctly.
The study findings demonstrate that for individuals in the 55+ age group, there is a lack of basic understanding of stocks and bonds, risk diversification, portfolios, and investment fees. The small percentage of correct answers for any combination of the financial questions presents a frightening reality, especially for those individuals tasked with making crucial financial decisions at retirement. Respondents fared better on questions that utilized plain language and avoided economic technical terms, suggesting a need to change the way financial products are worded and presented. Lusardi, Mitchell and Curto's research also lends further support to the need for financial education programs across the lifespan, especially for individuals confronting the complex realities of retirement financial planning.
To learn more about the financial literacy studies discussed in this issue of the Pulse, visit the full research summaries:
Financial Literacy and Planning: Implications for Retirement Wellbeing (2006)
Financial Literacy and Financial Sophistication Among Older Adults (2009) | 
