Life After Full-time Work Blog

And the impact of its absence, on life and on retirement

In a recent blog post I featured Dr Annamaria Lusardi’s brief LinkedIn post reminding us that Financial Literacy month in the US had just started. And I was reminded of an interview I conducted with her in 2021 and a blog post that I wrote, following it. My blog post identified a number of questions that I asked her, but didn’t show her answers, for the obvious reason that instead I provided a link to the interview so that you could listen to the answers for yourself.

Unfortunately that link no longer gets anywhere, so I’m grateful that Mirjam Guldemond, the ever-helpful Conference Manager at Pensions & Investments, was able to send me the original interview. And, since it’s so very insightful, I have now played it slowly and transcribed it, a painstaking task but very worthwhile, as I hope you’ll agree, because I’m now going to create a slightly edited version of it for this blog post [with some personal observations that I’ve added today, in these square brackets]. Actually, there’s enough for two blog posts, so this is simply the first one.

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Don: What would be different if the world were more financially literate? In other words, what are the benefits, to individuals, to their employers, to the world?

Anna: I think there would be many benefits. We would first of all be happier. In case you think that money doesn’t bring you happiness, I think that money actually does. [My addition today: here’s a link.] And it’s not just money per se; it’s being able to be in control of your finances, being able to have that confidence and knowledge in dealing with the decisions that we are asked to make every day.

Don: Our audience is in the business of pensions, in different roles. [At the time I was conducting the interview for members of the World Pension Summit.] And then as human beings, as parents, as grandparents. How can they help the young ones in their families to be more financially literate? And if by chance the kids then get into work without an adequate background in financial literacy, what can employers do to help? Because it’s clearly such a good thing.

Anna: First of all, I always suggest to all parents and grandparents that they should talk to their children and grandchildren about money. It’s time to do so. While in the past money was not considered to be a topic that you talk about, today we need to do so. It’s fashionable, it’s smart, it is the good thing to do. And I would say: give a piggy bank to a child, and you will transform that child instantly into a savvy banker. I’ve seen this done many times. People think that children are not interested in money; nothing could be further from the truth.

I think we need to instill that ease of speaking about money, and make sure that children become familiar with money, because otherwise they will stress about money, or they might have distorted views. So let’s teach them the things that they’re going to be dealing with, early on, with the proper education. You don’t need to talk about pensions when you’re two years old, but there are many things that a two-year-old wants to know.

We should also remind them that the fact that we take money from an ATM doesn’t mean that walls are producing money. [My own observation: I have a personal family recollection about exactly this point that Anna makes. It was many decades ago, when our daughter was very young. Our family was on vacation in Florida, and it was our habit in those days to draw money from a cash machine at a bank. One day we wanted to get something, and I said we didn’t have the money for it, meaning we couldn’t afford it. To which our daughter said to me, reassuringly: “That’s OK, get it from the bank, the bank always gives you money.”]

They need to realize that money comes from an account where it has been saved, and we need to give them a sense of a budget constraint.

But I also think that parents and grandparents, and citizens in general, should be advocates for financial literacy, for example in their schools. I think there is an important role for schools here. Not everybody is able to receive an education from parents or grandparents, and I think if it’s provided in school, we can enable access for everybody, and we can make the education rigorous as well.

I don’t want to teach Shakespeare to young people, but it would be good if they really learn it, and see how elaborate and beautiful it is. It should be the same about money. There is some part that is really designed for teachers; but as people age, we can’t provide everything in schools. And I think then there’s a very important role for the employer.

I don’t think that employers in general offer financial education. If they did, first of all I think it would show that they care. And it’s the profitable thing to do for employers as well. Let me tell you that every year we do a survey of personal finance. It’s called the P-Fin (Personal Finance Index) survey. We measure what people know about these topics that they’re making decisions about every day. In the most recent years we have asked how many hours people spend in dealing with personal finance issues, and how many of these hours are at work. Not only do people spend many hours (in fact, almost a day a week) in dealing with personal finance issues. People with lower financial literacy spend more time, a day and a half each week, dealing with their personal finance issues, and many of these hours are at work. So I think it’s very profitable for an employer to provide financial education, because financially fit employees are also more productive employees.

Don: That’s a clear win-win all around!

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[I switched the topic to retirement.]

Don: How is debt late in life remaking retirement?

Anna: [Dr] Olivia Mitchell and I edited a book about it. We wanted to study it because, first of all, often we think about savings, so we’re only looking at the asserts side of the balance sheet, but not looking at the liabilities side. And then when we started to look at the data closely, we realized one of the things that has changed: just how much more debt many retirees are carrying into retirement.

Not just a small amount of debt. Often people have half of the mortgage to pay off at retirement. You know, in a low interest rate environment, carrying debt might be less of a problem. But we need to be careful about this, because one of the problems about debt is that once interest rates start going up, then you have a bigger problem to service the debt.

And while mortgages were not our main concern, we also saw that people were carrying a lot of other types of debt into retirement, including credit card debt, and there were signs of potential financial distress already. For example, in one of our recent papers we show that people close to or already in retirement were contacted by debt collectors. So these people were carrying debt and were not able to pay it off.

We also asked a simple question to evaluate whether that was a problem, and asked respondents directly whether they were carrying too much debt. And about a third of people close to retirement said “yes” to that question. So I think, indeed, that maybe the debt part that we see people carry into retirement might eventually influence retirement, because if people have to service the debt, they might perhaps postpone retirement. And a recent indication in our data is that this might actually be happening.

So my concern is that we need to be careful. It’s so easy now to borrow, and there are so many sources of debt. And I worry about the young generation, who start their economic life in debt, and also the older generations, some of them still carrying student loans into retirement. That is becoming an important part of our financial life, so much so that it might even influence retirement.

We should be at the peak of wealth accumulation at that stage, but if people are having problems with debt then there is something that needs to be taken care of in their personal finances.

Don: That’s so true. I know people of my generation, and the next one, who are still carrying this kind of debt, including student loans.

***

[In the next blog post we’ll talk about a particular aspect of the financial literacy problem: the gender gap, and how a large part of it is caused simply by a lack of confidence. And we’ll end with the best advice we’ve been given, in our lives.]

Takeaway

Financial literacy brings confidence and happiness. Without it, we have stress and make mistakes. We spend hours every week on financial matters, and people with low levels of financial literacy spend more time than those with the relevant background, some of these hours being spent at work – so it’s actually a win-win for employers to provide that sort of education. The impact of debt is pernicious, when you carry debt, including student loans, into retirement.

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