Evidence on the Financial Capability of Elder Workers Facing Lump-Sum Retirement Plan Distributions

Late career workers with lump-sum retirement plans face important financial decisions. Because ability and confidence interact when making financial decisions, this paper asks two related questions: Are workers approaching retirement financially capable of making decisions regarding lump-sum retirement benefits? Do they see themselves as capable? Comparing self-assessed measures of financial capacity to more objective measures reveals patterns of under and overconfidence in financial matters by socio-economic group. Comparing questions correlation to overall score, compound interest concepts are found to be strongly correlated with overall financial literacy. Findings suggest that financial planners may act as partial compensation for a lack of financial literacy, especially among the wealthy. This papers findings support: (1) developing tools that help potential clients engage and assess the work of financial managers, (2) including both self-assessment and objective finance questions on planners’ client intake surveys and (3) facilitating client understanding of compound interest concepts.