How Overconfident Financial Knowledge Hinders Retirement Planning? Mediating Analysis and Heterogeneity of Retirement Funding Sources

Abstract

Under the background of general financial knowledge confidence and insufficient retirement planning, this study investigates the relationship between overconfident financial knowledge and consumer retirement planning. Using data from the National Financial Capability Study, this study employs probit regressions and finds that consumers with overconfident financial knowledge are less likely to have retirement planning, that is, contribute to retirement accounts regularly. This study further explores the mediators in this relationship and concludes that consumers who are overconfident in their financial knowledge tend to be more preference to risk, fail to make ends meet, and do not care about their financial situation, therefore are less likely to plan for retirement. Furthermore, compared to retirement accounts such as 401(k) that are through an employer, consumers with overconfident financial knowledge are more willing to engage in those such as IRA that are not through an employer. This study also finds that underconfident financial knowledge, another type of incorrect subjective evaluation of financial knowledge, is positively associated with retirement planning. Based on these findings, this study recommends policymakers reduce financial knowledge overconfidence, guide individuals to regularly pay attention to their financial situation, and encourage employers to actively participate in retirement plans.

JEL Classification: D12, N30, D80, D91.

Plain Language Summary

Using data from the NFCS in 2012, 2015, 2018, and 2021, this study investigates the relationship between overconfident financial knowledge and retirement planning. This study finds that consumers who are overconfident in their financial knowledge are less likely to plan for retirement, namely not regularly contribute to a retirement account like a 401(k) or IRA. Mediating analyses reveal that consumers who are overconfident on their financial knowledge tend to be more preference to risk, fail to make ends meet, and do not care about their own financial situation, therefore are less likely to plan for retirement. This study also distinguishes the different types of retirement accounts and concludes that the negative relationship between overconfident financial knowledge and retirement planning is more significant in consumers that only engage in 401(k)-type (through an employer) compared to those only engage in IRA-type (not through an employer). Besides, this study also finds a positive relationship between underconfident financial knowledge and retirement planning.

Keywords

overconfident financial knowledge retirement planning probit regression mediating effect

Introduction

In recent years, increasing life expectancy, aging trends, and worsening fiscal deficit have raised concerns regarding post-retirement economic security and life quality (Carmel et al., 2015; Kontis et al., 2017). Educators, financial institutions, and consumer policymakers have paid substantial attention to improving consumer retirement planning and promoting them to accumulate more assets for retirement (T. D. Lee et al., 2011). In such a context, the role of retirement planning has received considerable critical attention. However, most consumers don’t have a clear retirement plan such as regularly contributing to a retirement account. According to the 2021 National Financial Capability Study (NFCS) published by the Financial Regulation Authority of the USA, less than one-third of consumers regularly save money for their retirement accounts.

Retirement planning is the long-term preparation made by individuals before retirement to ensure their future retirement life, such as preparation for wealth, health, and happiness (Blanchett, 2023). Previous studies have concluded a positive connection between retirement planning and consumer wellbeing. In other words, rational, desirable, and sustainable retirement planning helps to improve consumer wellbeing (Valentina et al., 2019). In the case of a lower proportion of consumers with retirement plans, previous research has examined a lot of factors related to consumer retirement planning. To sum up, the predictors of consumer retirement planning involve four categories, which are demographic characteristics factors (such as gender and age), psychological factors (such as self-awareness), microeconomic variables (such as family size), and macroeconomic variables (such as fiscal situation) (Tomar et al., 2021).

Financial knowledge is an important predictor of retirement planning. Previous studies find that consumers with rich financial knowledge tend to formulate retirement plans earlier and more rationally. Besides financial knowledge, consumers’ subjective evaluation of financial knowledge also can’t be ignored. Previous studies divided consumers into three types based on their objective financial knowledge and subjective evaluation of financial knowledge, namely consumers with financial knowledge overconfidence, consumers with financial knowledge underconfidence, and consumers who evaluate their financial knowledge properly (Aristei & Gallo, 2022). Financial knowledge overconfidence refers to consumers who believe they have rich financial knowledge but actually lake of financial knowledge, which is characterized as overestimating their own financial knowledge (Kim et al., 2022). According to the 2021 NFCS, nearly a quarter of consumers overestimated their financial knowledge. Compared to low financial knowledge, overconfidence in financial knowledge has more serious negative impacts on consumer wellbeing. Although previous studies have pointed out that financial knowledge overconfidence is not conducive to formulating desirable retirement plans, there still some gaps remain.

Using the National Financial Capability Study (NFCS) from 2012, 2015, 2018, and 2021, this study investigates the relationship between overconfident financial knowledge and consumer retirement planning. Compared to existing studies, this study has contributions in three aspects. First, this study explores the mediators in this process, which helps to gain a more comprehensive theoretical understanding of the financial knowledge-financial behavior framework. Although previous studies reached a consensus conclusion that overconfident financial knowledge is not conducive to formulating specific retirement planning (Anderson et al., 2017), few of them delve into the potential mediators, which fails to answer why overconfident financial knowledge decreases the probability of retirement planning.

Second, this study divides different types of retirement plans based on different pension sources, which helps to understand whether the impact of overconfidence in financial knowledge on retirement plans varies. According to different sources of pension, retirement accounts can be divided into two types: 401(k) and IRA. The former is jointly paid by employers and employees, while the latter is only paid by employees. This difference is likely to result in varying negative impacts of overconfidence in financial knowledge (DiLellio & Ostrov, 2017), but there is little research on this issue. Dividing different types of retirement plans based on different pension sources gives this study more practical significance, which is beneficial for formulating targeted policies for different situations.

Third, this study also investigates how underconfident financial knowledge affects retirement planning. Previous studies mostly focus on the adverse consequences of overconfidence in financial knowledge (Anderson et al., 2017), and few of them investigate another aspect of incorrect assessment of financial knowledge-underconfidence in financial knowledge. Although the proportion of respondents who lack confidence in financial knowledge is less compared to those who are overconfident in financial knowledge, it cannot be ignored (Y. Lu et al., 2023). Therefore, investigating the relationship between underconfident financial knowledge and retirement planning improves the corresponding theoretical framework and is full of practical meanings for those who are underconfident about their financial knowledge.

Literature Review

Prior Studies on Consumer Retirement Planning

From a temporal perspective, retirement is a process that begins long before the retirement event occurs and lasts for a long time (Adams & Rau, 2011). Previous studies find that comprehensive retirement planning mitigates pressure and offers a more stable lifestyle over retirement. Retirement planning also makes it easier to meet potential consumer requirements of social interaction, positively enhancing retirement life quality (Sousa-Ribeiro et al., 2022). However, many consumers still have trouble implementing retirement planning rationally (Blanchett, 2023). Surrounding consumer retirement planning, previous studies mainly focus on two aspects, namely its theoretical foundations and predictors.

On the theoretical foundations of consumer retirement planning, previous studies summarize three theories that are helpful in explaining this behavior. The first is role theory. Role theory emphasizes the importance of role exit and role transition from the workplace to retirement (Wong & Earl, 2009). Retirement means the withdrawal or weakening of work and workplace roles, which means consumers need to adapt to their new roles after retirement. Therefore, this theory understands retirement planning from the perspective of adaptation, such as creating or maintaining multiple roles through retirement, which is beneficial for individuals to buffer the potential negative impact of retirement and improve post-retirement satisfaction (P. Lu & Shelley, 2021).

The second is a process theory of planning. This theory emphasizes the process of retirement planning, regarding it as a developmental process. This theory suggests that retirement planning can be divided into four stages, which are the representation of the retirement environment, the clarity of retirement goals, deciding to start retirement planning, and the formulation, implementation, and revision of retirement plans (Penn & Lent, 2021). Among them, the representation of the retirement environment refers to the individual using previous knowledge to compare the current situation with retirement expectations. The clarity of retirement goals refers to the specific goals set by individuals for their future retirement life, emphasizing clarity rather than quantity (Blanchett, 2023).

The third is ecosystem theory. Ecosystem theory emphasizes that developmental individuals are nested within a series of interrelated environmental systems (Peng & Min, 2020). Applied to retirement planning, this theory believes that individual factors are the most important influencing factors on retirement planning and decision-making at the micro level, but intermediate factors (such as the relationship with employers) and macro level factors (such as population structure and social security regulations) cannot be ignored (De Preter et al., 2013).

On the predictors of consumer retirement planning, many factors affecting consumer retirement planning have been discussed utilizing authoritative data and surveys, roughly divided into three categories: demographic characteristics factors, psychological factors, and a few microeconomic variables. Most demographic characteristics factors involving gender, race, marital status, and education level have been proven to affect retirement planning significantly. In detail, men (Baker et al., 2021), Whites (Kim et al., 2021), and young married people (Knoll et al., 2012) are less likely to suffer the risk of being in a financial dilemma during retirement. Moreover, Panu and Olli-Pekka (2018) suggested that increased education levels promote financial literacy, promoting consumer retirement planning, especially for women. With the emergence of behavioral finance, psychological factors are more incorporated into the investigation framework of retirement planning, such as inconsistency between recent consumer behavior and long-term preferences (Hershey et al., 2007), future time perspective (Mitchell & Moore, 1998), and future expectations. Determinants of whether consumers prepare for retirement embrace microeconomic variables as well, such as job skills programs and management training (Devaney & Kim, 2003), financial behaviors (Eccles et al., 2013), level of income (Hira et al., 2009), savings, and socioeconomic status (Noone et al., 2012), all of which are vital to consumer retirement planning.

Previous Studies on Overconfident Financial Knowledge

Consumer financial knowledge consists of subjective and objective financial knowledge, both of which make financial behaviors different, even though the impacts of subjective financial knowledge are greater in certain financial behaviors, such as risky borrowing and paying (Robb & Woodyard, 2011; J. J. Xiao et al., 2014). Objective financial knowledge refers to the basic and advanced knowledge of the individual generally judged by the financial questions put forward by Lusardi and Mitchell. Meanwhile, subjective financial knowledge is assumed to be a subjective self-assessment of personal knowledge evaluated by enabling respondents to assess their financial knowledge (Robb et al., 2015; Rostamkalaei & Riding, 2020).

The inconsistency originating from subjective financial knowledge exceeding objective financial knowledge results in overconfident financial knowledge, negatively affecting consumer financial behaviors (Kim et al., 2020). Xia et al. (2014) and Chu et al. (2017) have suggested that consumers who are overconfident in financial knowledge are more likely to suffer losses in financial market investments due to a lack of real investment ability and risk diversification. Utilizing the data from the National Financial Capability Study (NFCS) in 2015, S. T. Lee and Kim (2020) indicated that millennials who are overconfident in their financial knowledge are inclined to engage in inappropriate credit card management practices.

Prior literature has examined various determinants that may lead to overconfidence in financial affairs. For instance, O’Connor (2019) revealed that the interaction of consumer demographic factors and cognitive styles showed large differences in the effects on subjective and objective financial knowledge, which brings about an obvious distinction between the two and, in turn, makes consumers overestimate their actual financial knowledge level. Apart from this, the degree of overconfidence in financial knowledge also differs based on gender differences, and namely, it has been manifested that men usually show more confidence in the financial field than women generally (Barber & Odean, 2001; Kawamura et al., 2021). Moreover, Cude et al. (2019) deemed that education and income seem to weaken overconfidence while being a student aggravates overconfidence.

The Relationships Between Overconfident Financial Knowledge and Consumer Retirement Planning

Overconfident financial knowledge is considered to be negatively associated with consumer retirement planning (Giesecke & Yang, 2018). This conclusion is generally accepted by most studies. To verify this standpoint, taking advantage of data collected by National Financial Capability Study in 2018, S. T. Lee and Hanna (2020) examined this topic and believed consumers who are overconfident in financial knowledge tend to withdraw money from their retirement accounts upfront because they are not fully aware of the consequences of such financial behavior leading to leakage of retirement assets. Moreover, financial overconfidence makes it hard for young consumers to accurately anticipate future retirement costs, discouraging them from preparing for retirement economic sources (Richardson et al., 2022).

The negative relationship between overconfident financial knowledge and consumer retirement planning is moderated by micro and macro factors. Micro moderators mainly refer to the demographic characteristics of consumers themselves (such as gender, age, income level, and health status) and the characteristics of their households (such as the status of their offspring). In terms of gender, compared to women, overconfidence has a weaker negative impact on financial planning in the male population. This may be because men are more inclined than women to participate in financial planning, while women focus on planning in the areas of health, housing, and psychology, rather than financial planning after retirement. In terms of age, overconfidence has a weaker negative impact on financial planning compared to those who have just started working (Jiménez et al., 2019). Similarly, for individuals with higher income and health levels, overconfidence has a weaker effect on reducing financial planning. Also, the characteristics of their households moderate the relationship between overconfident financial knowledge and consumer retirement planning (Afthanorhan et al., 2020). If individuals will live with their offspring after retirement, the effect of overconfidence in financial knowledge on weakening retirement planning will be stronger. On the contrary, if there are children who need to be financially raised, even consumers who are overconfident in their financial knowledge will make retirement planning easier (Kerry, 2018).

Besides micro factors, macro factors also moderate this relationship, such as social support, government credibility, national policies, labor market status, and cultural atmosphere (DiLellio & Ostrov, 2017; Jiménez et al., 2019; Penn & Lent, 2021). However, there has been no consistent conclusion on the specific impact of macroeconomic moderators in previous studies. Taking social support as an example, some studies suggest that when social support is strong, consumers who are overconfident in financial knowledge will not actively plan for retirement because they believe that they can receive social support even if they do not have a plan (Klaauw & Wolpin, 2008). In this situation, social support strengthens the negative impact of overconfidence in financial knowledge on financial planning. On the contrary, some studies find that social support will improve the clarity of retirement goals for employees, thereby promoting their participation in retirement planning (Fitzpatrick & Moore, 2018). In this situation, social support weakens the negative impact of overconfidence in financial knowledge on financial planning.

Literature Gaps

Although previous studies explore the relationship between financial knowledge overconfidence and financial planning deeply, there are still some gaps. First, the mediators in this process have not been comprehensively investigated. Although previous studies reached a consensus conclusion that overconfident financial knowledge is not conducive to formulating specific retirement planning (Giesecke & Yang, 2018), few of them delve into the potential mediators, which fails to answer why overconfident financial knowledge decreases the probability of retirement planning.

Second, the different types of retirement plans based on different pension sources are ignored. According to different sources of pension, retirement accounts can be divided into two types: 401(k) and IRA. The former is jointly paid by employers and employees, while the latter is only paid by employees. This difference is likely to result in varying negative impacts of overconfidence in financial knowledge (DiLellio & Ostrov, 2017), but there is little research on this issue.

Third, existing studies fail to explore how other types of incorrect evaluation of financial knowledge affect retirement planning, such as underconfident financial knowledge. Previous studies mostly focus on the adverse consequences of overconfidence in financial knowledge, and few of them investigate underconfidence in financial knowledge. Although the proportion of respondents who lack confidence in financial knowledge is less compared to those who are overconfident in financial knowledge, it is still full of practical significance (Anderson et al., 2017).

Hypotheses

The main focus of this study is the relationship between overconfident financial knowledge and consumer retirement planning. Previous studies find that overconfidence in financial knowledge is a psychological state of consumers, indicating that they overestimate their financial knowledge, resulting in a series of undesirable financial behaviors, including shortsightedness, underestimation of risk, and overestimation of returns (Kim et al., 2022). Overconfident consumers, due to overestimating their financial knowledge, believe that they do not need to plan for retirement and will have sufficient funds to ensure retirement life (Simons, 2013). Besides, they believe that the return on retirement savings is too low, which is not conducive to obtaining excess returns (Philander, 2023). Therefore, consumers with overconfident financial knowledge tend to not have retirement planning. Based on the above, this study proposes Hypothesis 1 (H1).

Hypothesis 1 (H1). Consumers who are overconfident in their financial knowledge are less likely to plan for retirement.

Three potential mediators serve for the relationship between confident financial knowledge and retirement planning, which are risk attitude, financial status, and limited attention. First, consumers who are overconfident in their financial knowledge tend to be more preference to risk, and therefore are less likely to plan for retirement. On the one hand, individuals who are overly confident in financial knowledge tend to prefer risks, that is, they hope to gain high returns with high risks during investment (Pikulina et al., 2017). Overconfident financial knowledge indicates that individuals overestimate their financial knowledge, leading them to mistakenly believe that they have a good understanding of investment risks and returns, and they can effectively manage risks (Y. Lu et al., 2023). The theory of illusion of control indicates that when an individual encounters a financial risk event, overconfident financial knowledge makes individuals believe that their ability will quell the risk event or reduce financial losses, leading to their excessive negligence in handling the risk event and chasing high risks (Richard et al., 2010).

On the other hand, individuals with a preference for risk typically do not plan for retirement. Previous studies have suggested that depositing money into a pension account is similar to depositing money in a bank, which has little risks other than depreciation because of inflation (Goda et al., 2014). Therefore, regularly contributing to a retirement account like a 401(k) or IRA is considered a low-risk and low return, which does not conform to the investment principles of risk preference individuals. In other words, they will not contribute a lot to retirement accounts as risk-averse individuals do. To sum up, consumers with financial knowledge overconfidence tend to be more risk-preference, and therefore are less likely to have retirement planning.

Second, consumers who are overconfident in their financial knowledge tend to fail to make ends meet, and therefore are less likely to plan for retirement. On the one hand, consumers who are overconfident in their financial knowledge tend to fail to make ends meet. Individuals who are overconfident in financial knowledge tend to allocate a large amount of funds to high-risk projects because they believe they can gain high returns from them. But in reality, their financial knowledge cannot support them (Pikulina et al., 2017). The error calibration theory indicates that individuals with overconfidence in financial knowledge often overestimate the accuracy of predictions and underestimate the occurrence of risk events (Simons, 2013). Therefore, individuals who are overly confident in financial knowledge often have difficulties to achieve returns that match their investment and fail to make ends meet. On the other hand, individuals who cannot make ends meet tend to not have plans for retirement because they even exhibit strong financial fragility in the present, which makes it difficult to formulate their financial planning after retirement (Amrit et al., 2012).

Third, consumers who are overconfident in their financial knowledge tend to pay less attention to their personal financial condition, and therefore are less likely to plan for retirement. On the one hand, individuals who are overly confident in financial knowledge often have blindness in their financial situation, overestimating the accuracy of their grasp of private financial situations and believing that their financial situation is fully under control (Kim et al., 2022). The self-attribution theory suggests that individuals with overconfidence in financial knowledge often attribute success to their own abilities and failure to bad luck (Zuckerman, 2010). Therefore, they tend to not pay special attention to their financial situation. On the other hand, individuals who are not very concerned about their financial situation often lack a long-term assessment of the economic situation and a comprehensive consideration of savings and consumption at various stages of their life cycle, making them less likely to save for retirement (Tomar et al., 2021). Thus, this study puts forward the following hypothesis:

Hypothesis 2 (H2). Consumers who are overconfident in their financial knowledge tend to be more preference to risk, fail to make ends meet, and do not care about their own financial situation, therefore are less likely to plan for retirement.

Methodology

Data

The dataset in this study is from the survey data of the NFCS in 2012, 2015, 2018, and 2021 as conducted by the FINRA Investor Education Foundation. It aims to benchmark the key indicators of financial capability and assess how they change with potential demographic, behavioral, attitude, and financial knowledge characteristics. All data sets, and code books are available from the FINRA Investor Education Foundation website. This database is widely used in recent and authoritative research (Y. G. Lee et al., 2023).

As for the sample selection in this study, data from the state-by-state survey was used. In addition, this study removed anything missing values in key variables. The final sample size used in this study is 77,258.

Variable Specifications

Dependent Variable: Consumer Retirement Planning

The dependent variable is consumer retirement planning (retire_plan), measured by the question, “Do you regularly contribute to a retirement account like a 401(k) or IRA?” If the response is “Yes,” the variable is encoded as 1 and 0 otherwise. Although retirement planning includes multiple aspects such as financial planning, health planning, social and leisure planning, work planning, psychological planning, and residential planning, previous studies have shown that financial planning is the most important component of retirement planning because other plans are built based on financial planning (Anderson et al., 2017). Therefore, this study focuses on financial planning in retirement planning and employs fund reserves as a proxy variable for financial planning, which has been supported by existing research.

Independent Variable: Overconfident Financial Knowledge

The independent variable of this study is overconfident financial knowledge. This study first measures subjective financial knowledge and objective financial knowledge, respectively, and then identifies overconfident financial knowledge.

Subjective financial knowledge reflects consumers’ subjective evaluation of their financial knowledge. This study utilizes the question “How would you assess your overall financial knowledge?” to measure consumer subjective financial knowledge, with responses ranging from 1 (Very low) to 7 (Very high). Objective financial knowledge reflects respondents’ real financial knowledge, which is usually measured by questions about interest rate, inflation, and financial assets. There are 6 questions in NFCS used to measure objective financial knowledge, which are “Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?,”“Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?”, “If interest rates rise, what will typically happen to bond prices?,”“Suppose you owe $1,000 on a loan and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off, at this interest rate, how any years would it take for the amount you owe to double?,”“A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less.,” and “Buying a single company’s stock usually provides a safer return than a stock mutual fund.” For these 6 questions, if the answer to the question is correct, 1 point will be counted. Otherwise, 0 point will be counted. This study measures objective financial knowledge by the total score of all questions.

Following the approach of Y. Lu et al. (2023), overconfident financial knowledge is identified by respondents with no less than the average values of subjective financial knowledge and no more than the average of objective financial knowledge scores. The dummy variable over_confid equals 1 when a respondent overestimates his financial knowledge.

Control Variables

Concerning the existing literature (Allgood and Walstad 2015), control variables are incorporated as follows: gender, age, race, marital status, the number of financially dependent children, education status, annual income, credit record rating, and work status. All these control variables are directly from NFCS.

Mediators

Being identical to H2, this study employs three mediators: risk attitude, financial status, and limited attention. The first mediator, risk attitude, is employed to identify whether the respondent is a risk-lover. In NFCS, respondents are asked “When thinking of your financial investments, how willing are you to take risks?.” This question requires respondents to use 1 (not at all willing) to 10 (very willing) to evaluate their risk attitude. Following previous studies, this study introduces a dummy variable risk_lover to describe those respondents whose answer is 7 to 10.

The second mediator, financial status, is employed to identify whether the respondent fails to make ends meet. In NFCS, respondents are asked “Over the past year, would you say your spending was less than, more than, or about equal to your income?.” This study introduces a dummy variable spend_more to describe those respondents whose spending is more than income.

The third mediator, limited attention, is employed to identify whether the respondent is not concerned about personal financial condition. In NFCS, respondents are asked “How often do you think about your personal financial condition?.” This question requires respondents to use “Never” to “More than once a day” to evaluate their frequency of thinking about personal financial condition. This study introduces a dummy variable limit_attention to describe those respondents who never or less than once a month concerned about their personal financial condition. All variable specifications are presented in Table 1.

Table 1.

Variable Specification.

Type	Label	Meaning	Measurement	Attribute
Dependent variable	retire_plan	Retirement planning	“Do you regularly contribute to a retirement account like a 401(k) or IRA?”	1 = yes, 0 = no
Independent variable	over_confid	Financial knowledge overconfidence	The comparison between the subjective and objective financial knowledge	1 = overconfidence in financial knowledge, 0 = otherwise
Control variable	male	Gender of the responding consumer	From NFCS directly	1 = male, 0 = female
	age	Age of the responding consumer		Three categories: young people aged 18–34 (young); middle aged people who are 35–59 (middle); old people aged 60 or above (old)
	white	Race of the responding consumer		1 = white, 0 = otherwise
	married	Marital status of the responding consumer		1 = married, 0 = otherwise
	finhelp_chid	The number of financially dependent children		Number
	educ	Education status of the responding consumer		Three categories: high school or lower (highschool); bachelor’s degree (bachelor); postgraduate or higher (postgraduate)
	income	Income level of the responding consumer		Three categories: less than $50,000 (poor); at least $50,000 but less than $100,000 (middle); more than $100,000 (rich)
	credit_rate	Credit record rating of the responding consumer		Three categories: very bad or bad (bad); about average (average); good or very good (good)
	work_status	Work status of the responding consumer		1 = Being employed, 0 = otherwise
Mediators	risk_lover	Whether the respondent is a risk-lover	“When thinking of your financial investments, how willing are you to take risks?”	1 = risk-lover, 0 = otherwise
	spend_more	Whether the respondent fails to make ends meet	“Over the past year, would you say your spending was less than, more than, or about equal to your income?”	1 = spending more than income, 0 = otherwise
	limit_attention	Whether the respondent not to concern about personal financial condition	“How often do you think about your personal financial condition?”	1 = never or less than once a month, 0 = otherwise

Note. The contents are arranged by the authors.

Descriptive Statistics

The results of descriptive statistics are displayed in Table 2. Regarding the dependent variable of consumer retirement planning, the average value is 0.3164, indicating that only about one-third of respondents have a retirement account such as a 401(k) or IRA. The mean of overconfident financial knowledge is 0.2472, implying that financial knowledge overconfidence is universal. Measured on a 7-point scale, the average score for subjective financial knowledge was 5.7098, which indicates that most people are confident in their financial knowledge. However, the average score for objective financial knowledge was only 2.5611 out of 6, which shows the financial knowledge of the respondents is generally not high.

Table 2.

Descriptive Statistics.

Variables	Obs.	Mean	Std. Err.	Max
retire_plan	77,258	0.3164	0.4651	1
over_confid	77,258	0.2472	0.4314	1
male	77,258	0.4529	0.4978	1
age (young)	77,258	0.2806	0.4493	1
age (middle)	77,258	0.3515	0.4774	1
age (old)	77,258	0.3680	0.4823	1
white	77,258	0.7352	0.4412	1
married	77,258	0.5350	0.4988	1
finhelp_chid	77,258	0.6835	1.0622	4
educ (highschool)	77,258	0.4463	0.4971	1
educ (bachelor)	77,258	0.3890	0.4875	1
educ (postgraduate)	77,258	0.1646	0.3709	1
income (poor)	77,258	0.4811	0.4996	1
income (middle)	77,258	0.3266	0.4690	1
income (rich)	77,258	0.1923	0.3941	1
credit_rate (bad)	77,258	0.0771	0.2268	1
credit_rate (average)	77,258	0.1132	0.3168	1
credit_rate (good)	77,258	0.8097	0.3926	1
work_status	77,258	0.6762	0.4679	1
risk_lover	77,258	0.3186	0.4659	1
spend_more	77,258	0.1834	0.3870	1
limit_attention	77,258	0.1485	0.3556	1

Empirical Results

Benchmark Results

Table 3 shows the results of benchmark regressions. Columns (1) and (2) only keep the key independent variable, overconfident financial knowledge while Columns (3) and (4) involve all control variables. Columns (1) and Column (3) show the results of multiple OLS while Columns (2) and (4) show the results of probit regression. To control unobservable factors at the state level, this study adjusts standard errors for clustering by state following previous studies (Abadie et al., 2022).

Table 3.

Benchmark Results and Endogeneity Correction Result.

	(1)	(2)	(3)	(4)	(5)
Variables	retire_plan	retire_plan	retire_plan	retire_plan	retire_plan
Methods	OLS	Probit	OLS	Probit	Probit with IV
over_confid	−0.0147***	−0.0410***	−0.0183***	−0.0645***	−0.0249***
over_confid	(0.0043)	(0.0120)	(0.0039)	(0.0135)	(0.0023)
male			−0.0476***	−0.1678***	−0.0872***
male			(0.0030)	(0.0106)	(0.0077)
age (middle)			0.0850***	0.2429***	0.1422***
age (middle)			(0.0040)	(0.0135)	(0.0100)
age (old)			0.0258***	0.0923***	0.0911***
age (old)			(0.0043)	(0.0160)	(0.0112)
white			−0.0013	−0.0146	−0.1295***
white			(0.0034)	(0.0123)	(0.0087)
married			0.0395***	0.1755***	0.0099
married			(0.0034)	(0.0123)	(0.0089)
finhelp_chid			0.0056***	0.0089*	0.0551***
finhelp_chid			(0.0016)	(0.0054)	(0.0039)
educ (bachelor)			0.0076**	0.0291**	−0.0331***
educ (bachelor)			(0.0033)	(0.0127)	(0.0088)
educ (postgraduate)			0.0735***	0.2377***	0.1104***
educ (postgraduate)			(0.0045)	(0.0144)	(0.0109)
income (middle)			0.2020***	0.3019***	0.1978***
income (middle)			(0.0037)	(0.0127)	(0.0118)
income (rich)			0.3794***	0.4634***	0.3687***
income (rich)			(0.0048)	(0.0153)	(0.0166)
credit_rate (average)			0.0353***	0.1937***	0.0907***
credit_rate (average)			(0.0061)	(0.0276)	(0.0178)
credit_rate (good)			0.0966***	0.4232***	0.0725***
credit_rate (good)			(0.0049)	(0.0236)	(0.0155)
work_status			0.2401***	0.4718***	0.2248***
work_status			(0.0034)	(0.0148)	(0.0138)
constant	0.3138***	0.4852***	0.1696***	0.4507***	0.2847***
constant	(0.0018)	(0.0052)	(0.0064)	(0.0306)	(0.0272)
State dummy	No	No	Yes	Yes	Yes
Year dummy	No	No	Yes	Yes	Yes
Observations	77,258	77,258	77,258	77,258	51,503
Log likelihood		−48218.7630		−37381.3610	−70967.2990
R ²/Pseudo R²	.0002	.0007	.2500	.2248
F/χ²	11.4800	11.5900	2,332.7200	21,686.4000	120,316.1400

Note.***, **, and * stand for the significance level of 1%, 5%, and 10%, respectively. Robust SEs are in parentheses. Columns (1) and (2) are the results of OLS regression, so Log likelihood is not reported. Column (5) is the result of probit regression with instrumental variables, so R² is not reported.

In Columns (1) to (4), the coefficients of over_confid are significantly negative, indicating that consumers with financial overconfidence are less likely to formulate retirement plans. This preliminarily supports H1. Most control variables are statistically significant as previous studies indicated. The coefficient of male is significantly negative, suggesting that men are less likely to have retirement plans compared to women (Hoffmann et al., 2021). As for the age variable, the coefficients of age (middle) and age (old) are all significantly positive, implying that the middle-aged and the old are more inclined to formulate retirement plans because they have entered the second half of the lifecycle (Lachs & Han, 2015). Besides, those who are married, well-educated, white, rich, and employed and those who have higher credit and more financially dependent children tend to be more likely to have retirement plans (Penn & Lent, 2021).

Endogeneity Check

The results in benchmark estimations may be biased because of endogeneity such as omitted variables. Therefore, this study employs instrumental variables to alleviate the potential endogeneity. Following existing studies (X. Xiao et al., 2022), this study selects the first-order lag term of financial knowledge overconfidence and the proportion of consumers with overconfidence among respondents in the same year and region as two instrumental variables for endogenous financial knowledge overconfidence.

Both the two instrumental variables satisfy the requirements of correlation and exogeneity. The first instrument variable, the first-order lag term of financial knowledge overconfidence, is related to financial knowledge overconfidence. Based on the imprinting theory, overconfidence is a psychological deviation, which has inertia and will continue to have an impact on consumer behavior (De Cuyper et al., 2020). Therefore, the first-order lag term of overconfidence is related to current overconfidence. Furthermore, the first-order lag term of overconfidence is not related to the current error term because it is pre-determined (Fessler et al., 2020). Therefore, the first-order lag term of overconfidence meets the requirements of instrumental variables.

The second instrument variable, the proportion of consumers with overconfidence among respondents in the same year and region, is also associated with financial knowledge overconfidence. This is because the former is constructed based on the latter. In addition, this region-level instrumental variable is higher than the individual level of consumers, which is usually not related to the error term at the individual level (Chen et al., 2021). The result of the test for weak instrumental variables shows that F = 265.3700, which is far beyond the critical value and indicates that the two instrumental variables are not weak. Therefore, the two instrumental variables are satisfactory.

After controlling endogeneity, Column (5) of Table 3 shows a marginal effect of −0.0249 on the impact of financial knowledge overconfidence on retirement planning. It means that on average, when other variables remain unchanged, consumers with financial knowledge overconfidence have a 2.49% lower probability of retirement planning compared to those without financial knowledge overconfidence. From this result, it seems that the adverse effects of overconfidence in financial knowledge cannot be ignored. In the United States, the desire for workers to participate in retirement plans is quite strong, but it may be hindered by overconfidence in financial knowledge. According to a 2020 survey by the Pew Research Center in the United States, in addition to regular workers, 77.5% of non-traditional workers (such as temporary and gig workers) expressed a desire to receive retirement benefits, and 18.2% expressed a desire for automatic savings mechanisms to help them save. The Pew Research Center also found that some factors may reduce the ability of non-traditional workers to save for retirement. One of the biggest factors is struggling with immediate needs and emergencies. According to this survey, 66.4% of non-traditional workers report this factor. Even for those who have already had savings for retirement, 79.4% hope to use their savings before retirement. The difficulty for Americans to cope with immediate needs and economic conditions may be related to their overestimation of their financial knowledge, as this phenomenon is already a consensus in research.

Robustness Check

To produce more robust results, this study also performs comprehensive robustness checks for the empirical results. First, this study replaces the estimation method of the probit regression with logit regression. Second, this study drops the outliers of income less than $15,000 or more than $150,000. Third, this study changes the measurement of consumer financial knowledge overconfidence. Following previous studies (García et al., 2022), this study replaces the identification of financial knowledge overconfidence by comparing the subjective and objective financial capabilities of each respondent rather than comparing with sample means. Due to the different ranges of values for subjective and objective financial knowledge, this study divides the objective financial capability score by 6 and the subjective financial knowledge score by 7 to obtain the percentages of subjective and objective financial knowledge, respectively. If the subjective financial knowledge percentage of the respondent is higher than that of objective financial knowledge, this respondent is identified as having financial knowledge overconfidence. After these checks, the above conclusion that consumers with financial capability overconfidence are less likely to formulate retirement plans remains unchanged, which proves the robustness of H1.

Discussion

Mediating Effects

Using the method proposed by Baron and Kenny (1986), this study discusses the influence channels between overconfident financial knowledge and consumer retirement planning. Being identical to H2, this study tests the mediating roles of risk attitude, financial status, and limited attention. The stepwise checks for mediators are as follows:

\begin{matrix} Consumer retirement planning = \\ c * Overconfident financial knowledge + ε_{1} \end{matrix}

(1)

Mediator = a * Overconfident financial knowledge + ε_{2}

(2)

\begin{matrix} Consumer retirement planning = \\ c' * Overconfident financial knowledge + b * Mediator + ε_{3} \end{matrix}

(3)

In Equation 1, the coefficient c indicates the relationship between financial knowledge overconfidence and consumer retirement planning, which has been proved above. In Equations 2 and 3, $Mediator$ indicates the three mediating variables to be tested. If a and b are both significant, the mediating effects are established. Besides, if $c'$ is significant, the corresponding mediator is partial, which indicates there are still other mediators. If $c'$ is not significant, the corresponding mediator is a unique mediator. The results of mediating effects are shown in Table 4.

Table 4.

Mediating Analysis.

Mediator: Risk attitude
Variables	(1)	(2)	(3)
Variables	retire_plan	risk_lover	retire_plan
over_confid	−0.0645***	0.0863***	−0.0562***
over_confid	(0.0135)	(0.0282)	(0.0081)
risk_lover			−0.0379***
risk_lover			(0.0037)
Control variables	Yes	Yes	Yes
Observations	77,258	77,258	77.258
Pseudo R²	.2248	.2107	.2402
Mediator: Financial status
	(1)	(4)	(5)
Variables	retire_plan	spend_more	retire_plan
over_confid	−0.0645***	0.0288***	−0.0485***
over_confid	(0.0135)	(0.0014)	(0.0029)
spend_more			−0.0146***
spend_more			(0.0037)
Control variables	Yes	Yes	Yes
Observations	77,258	77,258	77,258
Pseudo R²	.2248	.1840	.2304
Mediator: Limited attention
	(1)	(6)	(7)
Variables	financ_vulner	limit_attention	retire_plan
over_confid	−0.0645***	0.1749***	−0.0558***
over_confid	(0.0135)	(0.0373)	(0.0147)
limit_attention			−0.0482***
limit_attention			(0.0161)
Control variables	Yes	Yes	Yes
Observations	77,258	77,258	77.258
Pseudo R²	.2248	.2746	.2296

Note.*** stand for the significance level of 1% respectively. Robust SEs are in parentheses. Control variables represents whether adding the control variables.

Based on the results of Table 4, H2 is supported. For the first mediator, risk attitude, Column (2) shows a positive relationship between overconfident financial knowledge and risk preference. Column (3) shows that consumers with overconfident financial knowledge tend to seek more risks, and therefore decrease their probability of engaging in retirement savings. Thus, risk attitude is a mediator in the relationship between overconfident financial knowledge and retirement planning. Similarly, financial status and limited attention also serve as a mediator in this relationship. Furthermore, in Columns (3), (5), and (7) of Table 4, all the coefficients of over_confid are still significant, which indicates the three mediators are partial.

The Different Types of Retirement Accounts

There are different types of retirement accounts, such as retirement accounts through an employer like 401(k) or other retirement accounts not through an employer like an IRA. The former is jointly paid by employers and employees, while the latter is initiated by employees themselves. Therefore, compared to 401(k)-type, IRA-type allows employees to invest in a wider range of investment products with greater flexibility and freedom. Under this circumstance, the negative impacts of financial knowledge overconfidence and retirement plans may be various because of different types of retirement accounts.

The NFCS dataset allows us to distinguish which retirement plan respondents are participating in. Specifically, NFCS asks respondents “Do you regularly contribute to a retirement account like 401(k) or IRA?,”“Do you have any other retirement accounts NOT through an employer, like an IRA, Keogh, SEP, or any other type of retirement account that you have set up yourself?,” and “Do you have any retirement plans through a current or previous employer, like a pension plan or a 401(k)?.” If respondents answer “no” to the first question, this study identifies them as having neither 401(k)-type nor IRA-type. If respondents answer “yes” to the first question, “no” to the second question, and “yes” to the third question, this study identifies them as having 401(k)-type but not IRA-type. If respondents answer “yes” to the first question, “yes” to the second question, and “no” to the third question, this study identifies them as having IRA-type but not 401(k)-type. If respondents answer “yes” to all three questions, this study identifies them have both types of retirement planning.

To explore whether the negative impacts of financial knowledge overconfidence and retirement plans are significantly different due to different styles of retirement planning, this study keeps the subsamples that only involve observations that having 401(k)-type but not IRA-type and those having IRA-type but not 401(k)-type. Then, this study generates a dummy variable 401(k), which equals 1 when the observation belongs to the group that has 401(k)-type but not IRA-type. This study interacts this dummy variable with the key independent variable, finanknow_overconfid. Employing the probit regression in this subsample, results that the interaction term (401(k)×finanknow_overconfid) is significantly negative, which indicates that the negative impacts of financial knowledge overconfidence and retirement plans are more significant in consumers that only engage in 401(k)-type compared to those only engage in IRA-type. In other words, with overconfident financial knowledge, consumers are more willing to engage in IRA-type. This is because IRA-type is more flexible and arbitrary compared to 401(k)-type, which is not subject to restrictions from employers.

The Relationship Between Underconfident Financial Knowledge and Retirement Planning

Consumer confidence in their financial knowledge can be divided into three types: overconfidence, underconfidence, and correct evaluation (Y. Lu et al., 2023). In the above analysis, we investigate the relationship between overconfident financial knowledge and retirement planning. However, in the sample, 8.56% of respondents show a characteristic of underconfidence in financial knowledge. Therefore, it is necessary to further discuss how underconfidence in financial knowledge affects retirement planning.

Using a similar measurement to overconfident financial knowledge, this study describes a consumer who is underconfident about his financial knowledge if his subjective financial capability is less than the average and the objective financial capability is greater than the average (Y. Lu et al., 2023). This study generates a dummy variable, finanknow_underconfid, which equals 1 when a respondent is underconfident in his financial knowledge. Then, this study introduces this dummy variable into the probit model. The result shows that the coefficient of finanknow_underconfid is significantly positive, which indicates that consumers who are underconfident in their financial knowledge are more likely to plan for retirement.

Previous studies have shown that the reason for determining financial behavior is not only the objective financial knowledge of consumers, but also their subjective evaluation of their own financial knowledge. Consumers who lack confidence in financial knowledge may feel worried about their financial situation after retirement, and therefore are more willing to plan their retirement to ensure their income after retirement.

Contributions and Limitations

This study focuses on the relationship between overconfident financial knowledge on retirement planning, which has contributions in three aspects compared to existing literature. First, this study explores the mediators in this process, which helps to gain a more comprehensive theoretical understanding of the financial knowledge-financial behavior framework. This also provides empirical evidence for existing theories of overconfidence in financial knowledge, such as the theory of illusion of control, the error calibration theory, and the self-attribution theory. Second, this study divides different types of retirement plans based on different pension sources (401(k)-style and IRA-style), which helps to understand whether the impact of overconfidence in financial knowledge on retirement plans varies. Dividing different types of retirement plans based on different pension sources gives this study more practical significance, which is beneficial for formulating targeted policies for different situations. Third, this study also investigates how underconfident financial knowledge affects retirement planning, which improves the corresponding theoretical framework and is full of practical meanings for those who are underconfident about their financial knowledge.

There are a few limitations in this study as well. First, in addition to the mediators investigated in this study, many other influence channels between overconfidence in financial knowledge and consumer retirement planning are not covered. With the development of behavioral finance, more psychological factors such as future time perspective and so forth should be incorporated into the research framework. Second, exploring moderators at macro levels in the relationship between overconfident financial knowledge and retirement planning. As is revealed by ecosystem theory, macro-level factors, such as population structure and social security regulations, also have impacts on individual retirement planning. Therefore, there may be some macro moderators in this process. Limited to data availability, this study fails to collect macro variables at the state-level. Future research can delve deeper into this issue. Third, investigating the relationship between financial knowledge underconfidence and consumer retirement planning. The results of benchmark estimations indicate consumers who are underconfident in their financial knowledge are more likely to plan for retirement. In fact, although underconfident financial knowledge helps retirement planning, plannings made with underconfident financial knowledge are probably not desirable. Although this study focuses on financial knowledge overconfidence rather than underconfidence, future studies may have more findings on the consequence of underconfident financial knowledge.

Conclusions and Implications

Based on the above findings, this study proposes the corresponding implications on how to optimize retirement planning. Firstly, reducing financial knowledge overconfidence. This study finds that consumers who are overconfident in financial knowledge are less likely to make retirement plans. Therefore, reducing overconfidence in financial knowledge can help increase the likelihood of retirement planning. From the perspective of policy-makers, on the one hand, it is necessary to achieve the popularization of financial knowledge by constructing a normalized financial knowledge education system and promoting the integration of basic financial knowledge modules into the general compulsory education system. These ways help to improve objective financial knowledge. On the other hand, it is necessary to guide individuals to correctly evaluate their financial knowledge, such as regularly organizing financial knowledge quizzes, to improve the compatibility between subjective and objective financial knowledge and make individuals evaluate their financial knowledge more accurately.

Secondly, guiding individuals to regularly pay attention to their financial situation. Mechanism analysis shows that individuals with overconfidence in financial knowledge are less likely to engage in retirement planning due to their lack of attention to their financial situation. Therefore, guiding individuals to regularly pay attention to their financial situation can help mitigate the adverse effects of overconfidence in financial knowledge. Policy-makers can provide consumers with an understanding of their financial situation by regularly notifying their spending status and bills.

Finally, encouraging employers to actively participate in retirement plans. This study indicates that compared to IRA plans where employers do not participate, overconfidence in financial knowledge has a weaker negative impact on retirement planning in 401(k) plans where employers participate. Therefore, actively guiding employers to participate in retirement plans can help increase the probability of individuals carefully planning for retirement. Policy-makers can mobilize employers to save money in employee retirement accounts by providing targeted subsidies to companies actively participating in employee retirement planning.

Footnotes

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This research was funded by the General Research Fund of Beijing Social Science Foundation (Grant No. 23JJB009).

ORCID iD

Fuzhong Chen

Ethics Statement

It is is not applicable.

Data Availability Statement

The datasets analyzed during the current study are available from the corresponding author on reasonable request.

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