Colorado PERA takes a holistic approach to retirement

The future seems hopeless to me and I can’t believe that things are changing for the better.

I am satisfied with my present financial situation.

Is either sentiment relevant to financial literacy? The U.S. Social Security Administration’s Office of Retirement and Disability Policy studied Psychosocial Factors and Financial Literacy and found a positive correlation between financial satisfaction and financial literacy (but a negative correlation with hopelessness). Perhaps most relevant to Colorado PERA and its members is the study’s finding that while financial literacy is essential to retirement planning and readiness, most Americans do not have adequate knowledge and understanding of financial matters.

(Eduardo Porter of The New York Times makes a similar argument, as discussed in an earlier PERA on the Issues post.)

The University of Michigan Health and Retirement Study (HRS), a longitudinal study that surveys 20,000 Americans over the age of 50 every two years, asked,

“Let’s say you have $200 in a savings account. The account earns 10 percent interest per year. How much would you have in the account at the end of two years?”

Tellingly, Annamaria Lusardi, in Planning for Retirement: The Importance of Financial Literacy, reported that only 18 percent of respondents correctly computed the compound interest question. And these are Americans over the age of 50 who have presumably made important financial decisions throughout their lifetimes, including opening checking accounts, applying for mortgages, and saving for retirement.

As Lusardi observes in FLAT World (Financial Literacy Around the World):

Across the world, people are being asked to assume more responsibility for their financial well-being. Because of changes in the pension landscape, notably a shift from defined benefit to defined contribution type pensions, individuals must determine not only how much to save for retirement but also how to allocate that retirement wealth. This responsibility is paired with financial instruments that are increasingly complex.

According to Lusardi, financial literacy is linked to retirement planning and those who are more knowledgeable about financial matters are more likely to plan for retirement. This means financial literacy affects retirement planning and retirement planning leads to retirement security. Ted Beck, President and CEO of the National Endowment for Financial Education, a nonprofit organization providing financial education resources at all financial stages, asserts that the retention rate for financial lessons learned among adults is less than two years. He argues that adults need “boosters” to maintain knowledge. Having practical information readily available is essential for adults to make informed decisions on financial matters.

The Federal Reserve studied the effect of financial literacy efforts on consumer behavior (Financial Literacy: An Overview of Practice, Research, and Policy) and found borrowers who had received individual counseling had a 34 percent lower delinquency rate than those who received no counseling. Additionally, those receiving financial training had increased average monthly net deposits with each additional hour of training (up to 12 hours). Workplace training programs are also an effective way to increase participation in 401(k) plans according to the study, with a significant positive relationship between financial education and the total savings rate.

Here in Colorado, there are several initiatives underway to increase financial literacy and provide for retirement security. PERA recently partnered with the Colorado Jump$tart Coalition, a nonprofit organization dedicated to improving the personal financial literacy of Colorado youth by “teaching the teachers” about their own personal financial situations through professional development opportunities. The last two Colorado legislative sessions have also seen bills proposed to study, assess, and report on the factors that affect Coloradans’ ability to save for a financially secure retirement.

In addition to providing its members with a hybrid defined benefit plan, PERA also encourages its members to supplement their savings with several voluntary retirement plans, including a low-cost 401(k) plan. And to help members become more informed about personal financial issues, The Dime contains information on topics relevant to public employees busy balancing work and family. By educating members on retirement planning and supporting their financial literacy, PERA hopes to ensure members feel in control of their financial future and will be able to answer in the affirmative if asked if they are satisfied with their present financial situation.

How did you answer the financial literacy question posed earlier in this article?

“Let’s say you have $200 in a savings account. The account earns 10 percent interest per year. How much would you have in the account at the end of two years?”

If you said $242, give yourself an A!