Low Financial Literacy Rates Among Young People Indicate Retirement Savings Delays

A lack of financial education in both high school and college tends to correlate not only with low levels of overall financial literacy, but also with a lack of urgency to start saving for retirement, according to a new study conducted by the SPARK [Society of Professional Asset Managers and Recordkeepers] Institute in partnership with Corporate Insight Inc.

SPARK’s research examined the aptitude, behavior and confidence of nearly 1,600 recent hires (ages 19 to 35), college students (ages 18 to 23) and high school students (ages 14 to 18). More than 50% of all surveyed groups exhibited low levels of financial literacy, and respondents generally underestimated the time needed to save for retirement.

On average, respondents thought 30 was the proper age to start saving for retirement. Among recent hires who still thought they have time to start saving, the average age increased to 40. Most student respondents also thought retirement savings began with a life milestone, like landing a first job or buying a house.

Savings Gap Causes

In the report accompanying the survey, SPARK pointed out that a lack of urgency in saving for retirement may delay workers from starting to save and therefore limit their ability to benefit from compounded growth over time.

Michael Ellison, president and CEO of Corporate Insight Inc., says waiting even a few years to begin saving for retirement can result in million-dollar losses to one’s retirement portfolio in the long-run.

Workers’ lack of awareness of the importance of starting to save early traces back to a lack of financial literacy, argues Tim Rouse, the SPARK Institute’s executive director. He emphasizes that there continues to be a “widening gap” between children who grow up wealthy—and are more likely to receive helpful financial advice from their parents—and children who grow up in lower-income households and do not have access to the same advice or resources.

Rouse also points out that many young people today look to social media for investing advice—primarily on TikTok—and are relying on information from uncertain sources.

According to the survey, parents were the most popular overall source of financial information and advice. Recent hires slightly preferred internet search results as their source, parents remained a strong source for them, as well. Employers, teachers and professional financial advisers were among the least frequent sources of information.

Continued Need for Education

In general, respondents felt their formal education did not prepare them well to make financial decisions. However, those who took specific finance education classes thought more favorably about their preparation level. Some 58% of high school respondents and 40% of college respondents reported taking one of these classes.

In terms of overall financial literacy rates, the survey found literacy aptitude rates consistent across all surveyed groups and that recent hires—despite being the oldest surveyed group—did not perform better on the assessment than respondents who were still in school. The respondents struggled most to understand the basics of inflation and the different between a stock and a mutual fund.

Rouse says SPARK is currently pushing for legislation that would require states to offer financial education classes in public high schools. According to Next Gen Personal Finance, only 26 states currently require students to take a stand-alone personal finance course in order to graduate. Two states—Alaska and Wyoming—and the District of Columbia currently have no financial literacy requirements.

The SPARK study also found that financial literacy rates were much lower among those who do not have a retirement account. Most of the respondents in the survey (69%) did not currently have a retirement account. Respondents said the top reasons they do not have a retirement account were because they have expenses that take priority over retirement and they do not make enough money to save for retirement.

Meanwhile, 76% of those who think they do not need to start saving and have more time said they were “very or extremely confident” in their ability to retire comfortably.

Ellison notes that automatic enrollment has helped recent hires start saving for retirement, regardless of their financial literacy level, but he argues that it does not make up for the issue of a lack of financial education. He says workers should not just “set it and forget it” when it comes to their retirement savings, because it is important to be at least somewhat engaged.

Ellison also says it is important that plan sponsors leverage their financial education and financial wellness resources with employees just entering the workforce. But overall, Rouse argues that more financial education is needed to encourage savings at an earlier stage of life.