The association between subjective and objective financial knowledge: Path analysis to savings behavior by age

Abstract

Backgrounds: The transition from defined benefit to defined contribution retirement plans, coupled with the introduction of stock options as part of employee retirement benefits, has significantly complicated the retirement planning process. This study aims to explore the roles of objective financial knowledge and subjective financial skills in navigating these complexities, particularly focusing on their impact across different generational cohorts. Methods: Utilizing a national sample of Americans, this research investigates the direct and indirect effects of subjective financial skills on the relationship between objective financial knowledge and various retirement savings products. Special attention is given to the generational difference between young and old to understand how these dynamics play out among those at the early and later stages of their retirement planning. Results: The study finds that among the younger generation, subjective financial skills not only act as protective factors but also enhance the relationship between objective financial knowledge and participation in the stock market. In contrast, older generations, regardless of their current status of finance-related knowledge and skills, tend to utilize traditional retirement plans such as 401 (k)s and pensions. This highlights the significance of subjective financial skills in enhancing engagement with complex savings options. Discussion: The results emphasize the necessity of fostering both financial knowledge and confidence in financial decision-making processes. There is a clear need for financial education interventions that not only impart objective knowledge but also bolster individuals’ subjective financial skills, thereby equipping them with the comprehensive capabilities required to make informed decisions about their retirement savings.