Does Financial Sophistication Matter in Retirement Preparedness of U.S. Households? Evidence from the 2010 Survey of Consumer Finances

We extend previous studies of retirement adequacy by testing the effect of financial sophistication on projected retirement adequacy. In an analysis of the 2010 Survey of Consumer Finances (SCF) dataset, we found that only 42% of households are adequately prepared for retirement compared to 58% in 2007. We tested the effects of three proxies for financial sophistication based on previous studies: (1) Education, (2) Use of financial planning service, and (3) Understanding of the SCF survey questions. Our multivariate analysis shows that households with college education are more likely to have an adequate retirement than those with less than high school. Households using a financial planner are more likely to have an adequate retirement than non-user households. However, good understanding of SCF survey is not significantly related to the likelihood of having an adequate retirement