Cognitive Constraints, Planned Savings, and Downstream Economic Behaviors

We study how cognitive ability and financial literacy relate to each step of the planning process for retirement, that is, individuals’ propensity to plan, planned savings amounts, and actual economic outcomes (savings, portfolio choice, annuity purchase). We find that cognitive ability and financial literacy play different roles: Having high financial literacy is an important and positive factor for all stages of the planning process, while high cognitive ability is especially relevant for planning concrete (and higher) savings amounts. Moreover, the propensity to plan and planned savings amounts help predict three downstream economic behaviors. Our findings suggest that when crafting public policy to develop individuals’ retirement readiness, next to improving financial literacy, another target should be to enhance cognitive skills and provide, for example, smart tools supporting the preparation of concrete plans