Retirement is about confidence as well as money

How much do you know about money? The way you answer this question determines a lot about how ready you are to retire, says Ramesh Rao.

Prior research has shown that people who are more comfortable taking financial risks tend to feel more confident about retiring. But new research by Rao, McDermott Centennial Chair in Banking and Finance and director of the Langston Wealth Management Center at Texas McCombs, sheds light on why.

The key variable, he finds, is subjective financial knowledge, or SFK: not what people know about money, but what they believe they know. People with higher levels of SFK are more likely to tolerate risk and to feel they’ve saved enough for retirement.

Rao’s research challenges traditional assumptions about financial education. Most programs focus on teaching facts, such as compound interest, budgeting, and 401(k) mechanics. But mindset may be just as important, he says. Confidence, not just competence, could determine whether someone saves early or puts it off.

Saving early has become important, as more and more individuals are forced to fund their own retirements. “There’s a major crisis in America,” Rao says. “Traditional pension funds are disappearing, and people are living much longer, and they’re not saving enough for retirement.”

The researchers — who include Congrong Ouyang of Texas A&M University and Khurram Naveed of the College for Financial Planning — analyzed data from the 2022 Survey of Consumer Finance, with information from 3,267 working adults nationwide. They found that both SFK and risk tolerance — as well as demographic factors like income, education, and health — significantly affect how ready people feel to retire.

Participants rated their financial risk tolerance, their SFK, and how prepared they felt for retirement on simple numerical scales. Analyzing relationships among the three variables, and controlling for income and education levels, the researchers found:

• Thirty-five percent felt satisfied or very satisfied with the adequacy of their retirement savings.
• Higher risk tolerance boosted the average adequacy perception 0.54 points, on a scale from 1 to 5.
• SFK explained nearly 40% of the relationship between risk tolerance and retirement confidence. Rao calls it a “very, very strong effect.”

He concludes that boosting people’s confidence in managing money may be just as impactful as boosting their actual knowledge — particularly for those with lower incomes or less formal education.

“You build their own confidence, and that itself will help society, because people will plan better,” Rao says.

That idea could reshape how we approach retirement education, he adds. “Our basic idea is that people’s actions are driven by what they believe. It shifts the focus from reality to perceptions of reality.

“What should financial literacy do? It should provide the tools and techniques for analyzing financial outcomes at some level. But more than that, you’ve got to build people’s confidence.”

“The Impact of Subjective Financial Knowledge on Perceived Retirement Adequacy for US Working Adults” is published in The Journal of Wealth Management.