Financial literacy for the young and young at heart

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By Sim Shuzhen

SMU Office of Research & Tech Transfer – Thanks to better healthcare, people are living longer – a trend that in theory should give us more opportunities to enjoy the company of loved ones and pursue activities we find meaningful.

But the reality is often quite different. Health crises and a lack of careful retirement planning can all too easily plunge the elderly into dire financial straits.

“People who are more financially literate plan more for retirement. They save more, invest better, and tend to space out their money over their retirement period,” said Professor Olivia S. Mitchell of the University of Pennsylvania’s Wharton School. “Yet, around the world, financial knowledge is fairly low among older adults.”

Professor Mitchell was speaking on 14 July 2017 at a roundtable on financial literacy and retirement preparedness hosted by the Singapore Management University’s (SMU) Centre for Research on the Economics of Ageing (CREA).

The roundtable, the second in a series of four planned for 2017, was organised to elicit feedback on CREA’s work from as many different perspectives as possible, said Professor Bryce Hool, director of CREA and dean of the SMU School of Economics. “We want our data and our research to actually be useful for shedding light on important issues in government, society and the private sector,” he added.

Professor Mitchell and other CREA researchers, for example, are using data from the Singapore Life Panel® (SLP) – the Centre’s flagship project and the largest internet-based, high-frequency survey of household economics and health in the world – to understand how financially literate older Singaporeans are, and hence find ways to help them better prepare for retirement.

Singapore’s report card

To measure financial literacy – defined as the ability to use knowledge and skills to manage financial resources effectively – survey respondents were tested on their understanding of the concepts of interest rates, inflation and risk diversification.

The data showed that financial literacy was strongly associated with a host of desirable outcomes, said Professor Mitchell. For example, financially knowledgeable Singaporeans are more confident about their retirement preparedness, hold more wealth and better-diversified portfolios, and are also more likely to be in better health.

But these associations do not indicate causation, cautioned Professor Mitchell. To get at that, the researchers would ideally need to compare financial outcomes between two groups of people with the same resources but with differing levels of financial literacy, she added.

Intriguingly, defying the expectation that older people tend to be less financially literate, people in their sixties scored better on the test than those in their fifties, said Professor Mitchell. This could mean that Singaporeans are using their retirement years to learn more about financial concepts, she suggested.

The feminisation of ageing

Another finding to emerge from the SLP data was that women tend to have a poorer grasp of financial concepts than men. Since women are statistically more likely to outlive their husbands, this knowledge gap puts them in a vulnerable position, said Ms Susana Harding, director of the International Longevity Centre (ILC) Singapore, a think tank established by the Tsao Foundation.

“We are seeing the feminisation of ageing, where women are going to form the oldest cohort. Living longer presents good opportunities, but there are also concerns,” said Ms Harding. “If you want to have active, successful ageing, you need to have financial security and enough resources to enjoy life in old age.”

With this in mind, ILC Singapore runs 20-week financial literacy training programmes to help 40-to-60-year-old women from lower income households develop financial plans for themselves. After going through the programme, participants report feeling more confident and empowered about money matters, said Ms Harding. For example, they are more knowledgeable about financial products that suit their needs, and better able to discuss money-related issues with their husbands and families.

For women who have always put family first, thinking about their own futures can be a foreign concept. “Sometimes the decision to think of themselves first is a really emotional one,” said Ms Harding. “But demographically we’re looking at three to five years of widowhood, and we need to be prepared for that eventuality.”

Never too early

Financial literacy is not just for people who are contemplating retirement, said Dr Koh Noi Keng, chair of the Citi-National Institute of Education Financial Literacy Hub for Teachers, which equips educators with financial literacy skills and trains them to impart these to their students.

With experiential, age-appropriate methods, secondary and primary school students, and even pre-schoolers, can be shown the ropes of making informed financial decisions, said Dr Koh. “Financial literacy is everywhere,” she enthused. “There are so many teachable moments that permeate all syllabuses. You don’t need a course dedicated to it; if it lends itself naturally, we’ll teach it.”

Secondary school students, for example, may have zero interest in retirement plans, but will happily discuss the pros and cons of various mobile phone plans, said Dr Koh. Even a math class on calculating the area of a circle can be ‘hijacked’ to teach a financial literacy lesson – which pizza place will deliver you the most bang for your buck?

A common misconception is that financial literacy is about making as much money as possible. “We’re not talking about getting rich,” Dr Koh emphasised. “We’re talking instead about the right attitudes and values—for example, why you should save, how, and what will happen if you don’t?” 

Money, she concluded, is only a means to an end. “We want kids to grow up understanding that we amass wealth and grow our money so that we can provide a comfortable lifestyle for our loved ones, protect ourselves in an emergency, and have peace of mind – we’ve planned for it.”

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