Combined with an increased need for retirement income due to longer life expectancies, the resulting insufficient funds of retirement savings constitute a serious concern (McKenzie and Liersch 2011). Hence, financial decisions with consequences for retiree income are now faced by many citizens and not only by professionals.Įmpirical evidence indicates that the increasing individual responsibility for retirement savings results in that people fail to save enough (Munnell et al. Worldwide today, pension systems enable and encourage active participation, and the income stream after retirement increasingly relies on private savings (Carlsson Hauff et al. One reason is the new policies increasing the responsibility imposed on individual citizens for saving to retirement (Benartzi and Thaler 2007). Despite this already heightened focus, arguably, the importance of saving decisions has grown during the last decades. In contemporary market societies, financial decision-making has for a long time been of paramount importance to individuals. In contrast to Knoll and Houts, we are able to ascertain uni-dimensionality of the fact-based knowledge construct, and we also use items with varying degree of difficulty, hence, enabling us to more reliably measure varying individual levels of financial literacy. We therefore include questions tapping a wider variety of topics in developing a new measure of financial literacy, based on Item Response Theory (IRT) as previously used by Knoll and Houts ( 2012). A limited number of questions may, although connected to retirement saving behaviours, fail to fully explain individual variation in these behaviours. In order to determine this influence, we develop a new objective fact-based measure of financial literacy to better capture the different levels of literacy that in different individuals have impacts on retirement financial behaviour.Ī potential weakness in previous research linking financial behaviour to financial literacy is that, for almost two decades, studies have largely relied on a measure of financial literacy consisting of the same limited set of three or five standard survey questions (Lusardi and Mitchell 2007). In this paper, we argue that saving for retirement involves these three stages, sometimes with varying demands on the individual, and that simultaneously assessing the impact of financial literacy on each stage will provide new knowledge of individual retirement financial behaviour compared with previous research which has investigated each stage separately. Financial literacy potentially influences retirement financial behaviour entailing planning, saving, and investment management.
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