Abstract
The study investigated the effect of financial literacy on retirement planning, retirement
contributions and retirement preparedness of the low-middle income earners. Poverty at
retirement has become one of the major problems in most countries and this is caused by many
factors. An increase in life expectancy and declining fertility rates have shifted the age
distribution of the population in many countries, including South Africa. The population of
elderly people relying on government grants has increased over the years, making state
pensions more difficult to fund. Other factors contributing to the increasing pressure on the
state pension are; the fact that people not saving enough for retirement, and early withdrawals
from pension funds. Without major reforms of the pension system the current pension system
might not be sustainable.
Evidence from the literature review revealed that financial literacy is an important factor in
retirement planning. There is consensus that people are not preparing adequately for retirement.
Previous studies conducted in South Africa have not exclusively looked at/considered financial
literacy as the main factor affecting retirement planning, hence the motivation for this study.
The evidence from the literature also shows that financial planning factors and risk appetite are
influenced by financial literacy. Bad lifetime financial management impacts negatively on
retirement planning. Poor retirement planning leads to dependency on government and family
at retirement which can be a burden. This is seen by an increasing number of beneficiaries for
old age grants which are purely financed by the government budget. The study aims at
identifying ways in which this can be moderated by suggesting strategies that will improve
peoples’ financial behaviours.
This study considered the complexity of the retirement products, the financial literacy of lowand
middle-income families, and the impact these factors have on retirement planning. It
investigated whether the level of financial literacy of individuals affects their investment
choices, retirement preparedness, and retirement-related expectations through their various life
stages. The study used 250 respondents to 1 questionnaire. Subsequently, the data and the
hypotheses were analysed using the SPSS software package through multivariate analysis,
correlation, and path analysis. Descriptive statistics were used to analyse the characteristics of
the demographic information of participants and retirement preparedness variables measured
with retirement planning score, retirement expectation and retirement provision. Explanatory
factor analysis (EFA) was adopted to test validity while Cronbrach’s alpha was used to estimate
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the reliability and internal consistency of the measuring instrument. Path analysis was used to
analyse the relationship between financial literacy and retirement preparedness.
Based on the correlation and path analysis results, it was established that education level has
an impact on the level of financial literacy and current income. Financial literacy is also
significantly correlated to current income since respondents with high levels of financial
literacy tend to have a higher income than those with lower financial literacy. The retirement
planning score was created by scoring the participants on the number of retirements instruments
they have. A positive significant relationship was found between retirement planning score and
expected retirement income. This was expected, given that people with more retirement-saving
products might have a higher retirement income expectation because they have accumulated
more. In general, the results showed that financial literacy is one of the important factors that
contribute to proper retirement planning.
The study added to the limited academic knowledge in the field of financial literacy and
retirement planning in South Africa. It provided recommendations on how to improve the
financial literacy of low-middle income earners with the intention of improving their retirement
planning. Policy recommendations that could reduce poverty at retirement were also made. The
behaviour of individuals was observed to be one of the most important factors that influence
individuals’ financial management. This could be explored further in future studies as it was
not the focus of this research.
Keywords:
Financial literacy, low- and middle-income families, old-age grants, pension, retirement
planning, state/public pension, life cycle hypothesis