Financial Literacy and Retirement Planning: Evidence from Malaysia

Transcription

1 Financial Literacy and Retirement Planning: Evidence from Malaysia 1 Rayenda Brahmana, 1 Chin-Hong Puah, 1 Daw Tin Hla, and 2 Suci Lestari 1 Faculty of Economics and Business, Universiti Malaysia Sarawak, Kota Samarahan, Sarawak, 94300, Malaysia 2 The University of Edinburgh Business School, Edinburgh, EH8 9JS, United Kingdom Abstract This research offers several appealing features for an analysis of financial literacy and retirement planning. We add financial education as the moderating variable on that association. The questionnaires were distributed to evaluate financial knowledge of working adult in their retirement planning decision. Our findings showed a significant relation to retirement planning behaviors with several demography variables such as gender and education level. Meanwhile, we found also that basic financial literacy has failed to contribute significantly on retirement planning, but not advance financial literacy. We also find that respondent literacy is higher when they were exposed to economics in school and to company-based financial education programs. 1. Background of Study Workers and retirees have increasingly been asked to secure their retirement and other saving as a precautionary of unpredictable future condition. Every government emphasizes this retirement fund as an important issue, and as a consequence, workers and retirees now has to confront a bewildering array of financial decision and wide range of insurance and pension fund. This process implies that it is important for workers and retirees to acquire financial knowledge regarding the retirement preparedness. But in practice, there is widespread illiteracy of financial knowledge event with the very basic economic concepts that needed to make sensible, if not rational, savings decision leading to a serious implication for the retirement planning of workers and retirees. Therefore, it is important to examine the association between financial literacy and retirement planning of workers and retirees. Malaysia is no exception for this financial literacy-retirement planning link. Ibrahim (2012) stated that the issue of retirement in Malaysia still considered undefined or not precise determined. Many private companies as well as Malaysia government provide several types of retirement products but the number of Malaysians who are interested in these products is still low. According to the latest Manulife Investor Sentiment Index survey in year 2013, more than half Malaysians have not started to plan for their retirement. The findings also documented lower percentage of Malaysians perceived retirement planning as a financial priority. According to Tan and Folk (2011), Malaysia is going through a tread of the growing number of older people. In July 2013, demographic profile of Malaysia population is estimated to be 29,947,600, which are the 40th most populated countries in the world. The population of Malaysia continues to grow at a rate of 2.4% per year. This is not to mention that world bank reported 69% of the population is between the ages 15 to 64 is the number of people who could potentially be economically active. This implies that Malaysians should give more attention to the wealth planning of their working force. Additionally, Malaysian workers and retirees claimed that that saving through the organization and government pension plan is still not enough to cover living expenses in the future after retirement (Ibrahim, 2012). They argued that Malaysian retirement schemes under Employee Provident Fund (EPF) do not provide enough saving for expenses in their retirement years. They blame EPF for not providing

2 good returns from their investment. Hence, they have to face financial problem during their retirement years as compared to those who have appropriate early retirement planning. Not everyone will be ready to get involved in retirement planning although it is a simple process for them. Most people do not plan earlier simply because they think they are still young as they are still aged 25 to 39 years old. Another reason is their incomes are quite low and they expect to achieve sufficient income level in their golden years. Besides that, 99.90% of Malaysian citizens will withdraw their EPF saving in a lump sum when they reach the age of 55 (The Star Online, April 2009). 70% of Malaysians will finish or use up the EPF saving after within three years and financial problem finally comes to them. What explains this low level of retirement preparedness? Why do people do such a poor job, when it comes to designing and carrying out retirement saving plans? This paper explores the hypothesis that poor planning may be a primary result of financial illiteracy. It is noteworthy that finance literature argues that retirement unpreparedness is due to financial illiteracy (i.e, Bernheim, 1998; Clark et al, 2004; Lusardi and Mitchell, 2007a, b). Previous studies offer few insights regarding the reasons why people do not plan for retirement, nor do they illuminate the roles that planning and information costs might play in affecting retirement saving decisions. Therefore, this research aims to investigate whether financial literacy has significant effects on retirement preparedness. To gain better insight into these issues, we have devised financial literacy and retirement planning questionnaire of Lusardi and Mitchell (2007a), including demography questions, financial education, and questions that measure how workers make their saving decisions, how they collect the information for making these decisions, and whether they possess the financial literacy needed to make these decisions. 2. Literature Review Retirement planning is associated with positive attitude towards the perception of individual control (Mutran et al. 1997). More expectation of life can be realized when greater proportion of finance for use in time of retirement (Aiken, 2002). Thus, retirement planning has similar benefits for individuals. Based on Kassahau (1974) study, financial planning can motivate other behaviours which facilitate the retirement process. The retirement planning has also been found to lead towards less depression. Therefore, the retirement planning has a variety of benefits and deserves further study. Although financial planning is important to everyone, many people are still not investing and saving enough. However, most people are transiting into retirement and live a relatively crisis-free life. Based on Zahava (2010), the transition to retirement is satisfying. Retirees generally adapt in retirement and also being reasonable in life satisfaction. Individuals who have unrealistic expectation of the social and financial nature of retirement may have their satisfaction lowered (Taylor, Shultz & Greene, 2006). That is why some individuals return to their workplace although they are not doing so for income but psychological wellbeing of themselves. Economics literatures argue that retirement planning is closely related to financial literacy (e.g. Ameriks et al. 2003; Lusardi, 1999, 2008; and Lusardi and Mitchell, 2006, 2007a,b). The findings address the importance of financial literacy such as interest rate, inflation, and risk diversification on planning their future personal financing. This is in line with Hogarth et al (2005) who conclude that low financial-

3 educated consumers are disproportionately represented amongst the unbanked, those lacking any kind of transaction account. Other authors have also confirmed the positive association between financial literacy and financial behavior. For example, Calvert et al (2005) find that more financially sophisticated households are more likely to be risk planner where they tend to acquire risky assets. Campbell (2006) finds the significant relationship between financial knowledge and investment mistakes in mortgage refinancing. Mandell (2004) addresses that low level of financial knowledge leads to bad personal financial management skills. People who have not known about time value of money tend to have poor credit management and fail to answer question related to personal finance or stock market or other investment. In Europe context, Miles (2004) showed that borrowers in UK had weak understanding about mortgages and interest rate. Lastly, Caskey (2006) has highlighted that personal finance literacy is important to increase the performance of the wealth and credit patterns of low- and moderate-income households. Interestingly, many people have been identified as financial illiterate. For instance, US National Council on Economic Education (2005) finds low level of financial concept among students and working people. Moore (2003) finds that people tend to be remarkably uninformed about the significance of Social Security plan and pension due to their lack of financial knowledge. ANZ Banking Group survey in 2005 documents there were 3,500 randomly chosen respondents age 18 and above evaluated understanding of topics ranging from investment fundamentals, retirement planning, and financial records, to basic arithmetic. 67 percent of respondents claimed they understood about compound interest, but a mere 28 percent were rated as having a good level of comprehension when faced with an actual problem to solve. In Korea, there is Jump$tart Coalition survey which finds that young Koreans fared no better than their American counterparts when tested on economics and finance knowledge, with most receiving a failing grade. Surprisingly, this low level of financial knowledge is found on those in low social classes and those with low income. Christelis et al (2005) found that majority of European scored low on financial numeracy. Meanwhile, there is 71% of adult Japanese knew little about capital market investment. OECD (2005) reported that young Korean and young American have lack of financial concepts. Moreover, that research also documented a positive correlation was detected between socioeconomy demography profile and financial literacy. In German, 80% of respondents were confident about their knowledge in finance, but only 42% could answer at least half of the financial literacy test correctly. Malaysia is no exception. A HSBC report entitled The Future of Retirement, a Balancing Act documented that Malaysians were the highest in Asia (28%) to say have a bad financial planning knowledge. Hijrah Wealth Management claimed that on a scale of one to ten, the financial literacy level of Malaysian was below five on average after taking into account the people in both rural and urban areas 1. Responding to prior research about lack of financial literacy, several education programs have been launched by policymakers or employer to tackle this issue. For instance, there are tonnes of finance seminar offered in order to enhance people financial knowledge. However, there is little evidence that such programs are effective (Lusardi and Mitchell (2007a). Those policymakers do not have sufficient information on what financial concepts is the most effective in enhancing retirement planning; a gap that this research aims to tackle. 1 See

4 This research contributes in threefold. First, Most of research was conducted in developed countries such US, UK, Japan, and other developed nations. This research explores the role of financial education on financial literacy-retirement planning in emerging market such Malaysia. It may become a benchmark for further research which will take emerging countries as the samples. Second, this research is different from prior research because it treats financial education as moderating variable. As we can see from previous research, there is positive contribution of financial education, but it is only a small effect. Lastly, we break down financial literacy into basic and advance concepts. This is due to tackle the issue about whether financial literacy is more on knowledge or cognitive intuition. Basic financial literacy that addressed by Lusardi (2004) is a simple logic calculation. Prior research argued that people with no finance background may answer the question correctly following their logical cognition. Therefore, we add what-so-called advance financial literacy items in our research for robustness reason. Our full research framework can be seen at Figure 1. Figure 1. Research Framework Demography Profile Financial Literacy Retirement Planning Financial Education 3. Methodology 3.1 Data This research conducted survey study by distributing the questionnaire in Malaysia. We successfully collected seven hundreds, yet, only 445 questionnaires were useful. This is different from the conventional financial literacy literature which commonly uses National Household Survey (NHS). Our main reason is there is no such NHS study in Malaysia that can measure the financial literacy and retirement planning. Another reason is there is a possibility of methodological limitation by using NHS because it is very hard to trace and match the cross-sectional entity. The questionnaire items were developed by adapting (Davis, 2007; Haiyang & Ronald, 1998; Joo & Grable, 2005; Lusardi and Mitchell (2007a), and were designed to consist of 4 sections. Section A consists of demography profile of respondents including gender, age, education level, income level, type of occupation, and marital status. This section is designed to know the effect of individuals' difference in retirement planning behaviour. Section B consists of financial education of respondents, whilst section C

5 consists of financial literacy. The financial literacy is divided into two sub-sections: (i) basic financial literacy, and (ii) advance financial literacy. Lastly, section D was developed to capture the view of respondent towards retirement planning. 3.2 Literacy Measurement The measurement of financial literacy is adapted from Lusardi and Mitchell (2007a). It is composed of two sub-dimensions. The first sub-section aims to assess basic financial literacy covering interest rate, inflation, and discounted value (refer to Box 1). Meanwhile, the second sub-section aims to measure more advanced financial literacy such as the difference between stocks and bonds, the role of stock market, risk diversification, and the link between bond prices and interest rate. Note that respondents are instructed to answer the questions without using calculator or seeing advice from others. Box 1 reports also the factor loading of the items. As suggested by Hair et al. (2010), we use factor loadings to assess the validity of the items. The lowest loading value is which is item number 5 whilst the largest loading value is which is item number 1. The loadings for all items exceeded the recommended value of 0.5 or averagely higher than 0.5 (Hair et al., 2010). Hence, it can be concluded all the items measuring a particular dimension loaded highly on that construct thus confirming construct validity Box 2 provides also the loading values of advance financial literacy. With a cut-off of 0.5 each or averagely, we find the items has averagely higher than 0.5 loadings. The lowest value is item number 8 with the loading value of , and the highest value is item number 2 with loading value of As such, we can observe that all the items measuring a particular construct loaded highly on that construct thus confirming the validity. Box 1 Items of Basic Financial Literacy (Adopted from Lusardi and Mitchell, 2007a, 2007b) Items (i) Presume you had Rm100 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? Answer: (a) More than Rm102; (b) Exactly Rm102; (c) Less than Rm102; (d) Do not know; (e) Refuse to answer (ii) Presume you had Rm100 in a savings account and the interest rate is 20% per year and you never withdraw money or interest payments. After 5 years, how much would you have on this account in total? Answer: (a) More than Rm200; (b) Exactly Rm200; (c) Less than Rm200; (d) Do not know; (e) Refuse to answer (iii) Presume 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? Answer: (a) More than today; (b) Just the same; (c) Less than today; (d) Do not know; (e) Refuse to answer (iv) Presume a friend inherits Rm10,000 today and his sibling inherits Rm10,000 3 years from now. Who is richer because of the inheritance? Answer: (a) My friend; (b) His sibling; (c) They are equally rich; (d) Do not know; (e) Refuse to answer (v) Presume that in the year 2012, your income has doubled and prices of all goods have doubled too. In 2012, how much will you be able to buy with your income? Answer: (a) More than today; (b) Just the same; (c) Less than today; (d) Do not know; (e) Refuse to answer Loadings

6 Box 2 Items of Advance Financial Literacy (Adopted from Lusardi and Mitchell, 2007a, 2007b) Items (i) Which of the following statements describes the main function of the stock market? Answer: (a) The stock market helps to predict stock earnings; (b) The stock market results in an increase in the price of stocks; (c) The stock market brings people who want to buy stocks together with those who want to sell stocks; (d) None of the above; (e) Do not know; (f) Refuse to answer (ii) If somebody buys the stock of firm XYZ in the stock market, Which of the following statements is correct? Answer: (a) He owns a part of the firm (b) He has lent money to the firm (c) He is liable for firm XYZ s debts; (d) None of the above; (e) Do not know; (f) Refuse to answer (iii) Which of the following statements is correct? Answer: (a) Once one invests in a mutual fund, one cannot withdraw the money in the first year; (b) Mutual funds can invest in several assets, for example invest in both stocks and bonds; (c) Mutual funds pay a guaranteed rate of return which depends on their past performance; (d) None of the above; (e) Do not know; (f) Refuse to answer (iv) Which of the following statements is correct? If somebody buys a bond of firm XYZ: Answer: (a) He owns a part of the firm (b) He has lent money to the firm (c) He is liable for firm XYZ s debts; (d) None of the above; (e) Do not know; (f) Refuse to answer (v) Which asset normally gives the highest return in long term (10-20 years)? Answer: (a) Savings accounts; (b) Bonds; (c) Stocks; (d) Do not know; (e) Refuse to answer (vi) Which asset displays the highest fluctuations over time? Answer: (a) Savings accounts; (b) Bonds; (c) Stocks; (d) Do not know; (e) Refuse to answer (vii) When an investor spreads his money among different assets, does the risk of losing money: Answer: (a) Increase; (b) Decrease; (c) the same; (d) Do not know; (e) Refuse to answer (viii) True or False: If you buy a 10-year bond, it means you cannot sell it after 5 years without incurring a major penalty. Answer: (a) True; (b) False; (c) Do not know; (d) Refuse to answer (ix) True or False: Stocks are normally riskier than bonds. Answer: (a) True; (b) False; (c) Do not know; (d) Refuse to answer (x) True or False: Buying a company stock usually provides a safer return than a stock mutual fund. Answer(a) True; (b) False; (c) Do not know; (d) Refuse to answer (xi) If the interest rate falls, what should happen to bond prices? Answer: (a) Increase; (b) Decrease; (c) the same; (d) Do not know; (e) Refuse to answer Loadings Financial Education We measure the financial education by using a categorical data approach. In the questionnaire, we asked How much of your education was devoted to economics?, How much time you spend your time for economics news?, and How many time have you attended economics/finance related seminar in your life?. The respondents have to answer either A lot, Some, Little, Hardly at all, Do Not Know, and Refusal. We then regrouped the responses of Do not know and Refuse to answer into Hardly at all answers for the regression purpose. Note that the loading values of all items for financial education were higher than 0.5 confirming the validity of items for financial education dimension. 3.4 Retirement Planning We develop retirement planning question by adopting EBRI retirement confidence survey and Ameriks et al (2003). This module asks respondents about their retirement plans such as their confidence about their retirement saving, the tenure of their retirement, and their simple calculation of retirement funds. Box 3 shows it in detail. It is noteworthy that all items were developed using 5 likert scale measurement except the fourth questions regarding the tenure of their retirement. It is an open-ended

7 question where respondents may write any number larger than 0. The latter, we transform it into interval of 1-5 by rearranging the answers from first quartile until fifth quartile. Those who fell into first quartile were assigned by 1, and those who fell into fifth quartile were assigned by 5. Box 3 Items of Retirement Planning (Adopted from Ameriks et al., 2003; the EBRI in its Retirement Confidence 2014) Items Loadings Overall, how confident are you that you did a good job of preparing financially for your retirement? Are you (and/or your spouse) currently saving for retirement? Not including Social Security taxes or employer provided money, have you (and/or your spouse) personally saved any money for retirement? For about how many years have you saved (did you save) for retirement? Have you ever tried to figure out how much your household would need to save for retirement? Box 3 also documented the loadings of the retirement planning validity. The smallest loading was the first question with loading value of , and the largest loading was the fourth question with loading value of Our validity test showed that all values were higher than 0.5 or averagely higher than 0.5 implying all items exceeded the recommended value of 0.5 or valid enough to represent the dimension (Hair et al, 2010). 4. Results and Discussion 4.1 Respondent Profile Respondents profiles were analyzed from demographic aspect such as gender, age, marital status, education level, and income level. Based on 445 questionnaires that were completed and returned, 46 percent of total respondents were male and 54 percent were female. There were 62.4 percent of total respondents were in the age of 22 to 30, percent in the age of 31 to 40, 7.10 percent in the age of 41 to 50 and 1.3 percent in the age of 51 to 60. Based on the respondents information analysis on marital status, percent of the respondents were single while 32.3 percent were married. For the education achievement, the respondents possessing qualifications of Secondary School were percent, those possessed qualifications of Diploma were 8.40 percent, those possessed First Degree qualifications was percent, and those that holding Master Degree was 4.90 percent. For income level, 7.10 percent of the respondents indicated earning less than or equal to RM1, 000 monthly percent of respondents are earning between RM1, 001 to RM2, 000 monthly. Next, percent of the respondents are earning between RM2, 001 to RM3, 000 monthly. Additionally, percent respondents revealed income range of RM3, 001 to RM4, 000. The respondents earning between RM4, 001 and RM5, 000 was 6.20 percent. Besides that, 7.10 percent of the respondents are earning RM6, 001 and above. In summary, the respondents were consisted of mostly female, young in age, single and highly educated. Table 1 below shows the frequency and percentage of respondents demographic from summarizing the respondents profile statistics obtained from the data collection, representing the information from the distributed questionnaires.

8 Table 1 Frequency and Percentage of Respondents Demographics Variable Category Frequency Percentage Gender Male Female Age Marital Status Single High Education Achievement Income Level Married Secondary School Diploma First Degree Master Degree Less than or equal to RM1,000 Between RM1,001 and RM2,000 Between RM2,001 and RM3,000 Between RM3,001 and RM4,000 Between RM4,001 and RM5,000 Between RM5,001 and RM6,000 RM6,001 and above Table 2 Descriptive Statistic Result Variable Mean Standard Deviation Education Level Income Level Family Working Retirement Planning Behaviour Table 2 shows the mean and standard deviation of all the composite variables using original values. The result show that the mean scored for the five components varied from to and standard deviation for each component was from to For retirement planning behaviours, high mean score of was obtained and standard deviation was Here it is found out that average of each component was considered high except for retirement planning behaviour. 4.2 Basic Literacy Description As stated earlier, the measurement of literacy captures the ability to perform simple calculation covering basic finance. The responses to these questions are reported in Table 3. Most respondents answer the first question correctly with the rate of 92.4%. The percentage of incorrect responses is only 3.7%. Interestingly, the proportion of correct answers decreases relatively to around 75%, when we asked them question about interest compounding, time discounting, and money illusion. Questions about time value of money and money illusion have more than 20% incorrect answers, and compounding interest

9 question has 18% incorrect answers. It is also noteworthy that while many respondents answer each individual question correctly, the proportion of respondents who answered all five questions correctly is only 54%. This implies basic financial literacy of the respondents is not widespread. Table 3 Basic Financial Literacy Panel A reports the proportion of respondents answering correct, incorrect, and don t know questions to each basic financial literacy items. Panel B depicts the distribution of the number correct, incorrect, and don t know to each basic financial literacy items Panel A: Basic Financial Literacy Weighted percentages of correct, incorrect, and "don't know" (N=465) Numeracy Compounding Interest Inflation Time Value of Money Money Illusion Correct Incorrect Don't Know Panel B:Summary of Basic Financial Literacy Response Weighted percentages of correct, incorrect, and "don't know" (N=465) Number of correct, incorrect, and don't know out of 5 questions None All Correct Incorrect Don't Know We further investigate the level of financial sophistication of respondents by adding several items to the module. The items are adopted from van Rooij et al (2011), and consist of 10 items. The exact wording of the items is in Box 2. These 10 items is obviously more complex questions than the previous set. It covers further knowledge of finance covering investment and portfolio choice. These questions were constructed to assess the knowledge of risk and returns for stocks, bonds, and mutual funds. Following van Rooij et al (2011), we attempt to explore the respondent understanding about risk diversification, mutual fund mechanism, and the relationship between bonds and interest rates. Interestingly, our first pilot study revealed that respondents felt reluctant to answer the questions. Even worse, those self-administered questionnaires were dominantly left blank by the respondents. The second pilot study was conducted by two modifications. First, the questionnaire distribution was conducted by face-to-face. This is important to avoid misunderstanding from questions objectives. We sometimes rephrased the items to make it easier to understand. For instance, Q8 supposedly states True or False: If you buy a 10-year bond, it means you cannot sell it after 5 years without incurring a major penalty.. We occasionally modified it into Do you think you can sell you 10-year bond after 5 years without major penalty?. Another examples is Q10 which is True or False: Buying a company stock usually provides a safer return than a stock mutual fund.. We occasionally modified it into Which one

10 is safer? Buying stock or mutual fund?. Our second modification is the gratification. We mentioned to respondents that by answering those 10 items, we can give them not only souvenirs but also the results whether they are capable enough in finance or not. Moreover, we gave certificate stating the respondents have joined financial literacy test. Responses to these items are depicted in Table 4. As expected, the pattern of answers is much different than from basic literacy items. For example, the proportion of correct answers on each question is much lower. In basic literacy items, the lowest correctness is 72.8% (money illusion question), meanwhile, in this advance literacy items, the highest correctness is 70.2% (Q6 about asset risk). Not more than two-third of respondents know about the function of stock market, and less than half of respondents know the return ladders of financial assets. Respondents also display difficulty in grasping risk diversication. For example, less than 60% of respondents know about risk ladder between stock and bonds, and around 40% of respondents know that mutual fund is safer than stock trading. Interestingly, our findings show not more than 20% of respondents know the relationship between bond prices and interest rates. Furthermore, not only the proportion of incorrectness increases, but also the proportion of respondents who answered do not know. For example, while 33% of respondents are incorrect about which financial assets highest return has over 10 to 20 years, there is also 17% of respondents do not know the answer to this questions. Similarly, there is around 40% of incorrect answer about the relationship between interest rates and bond prices, 41% of respondents had answered do not know about this question. Panel B of Table 4 depicts that there are only 4.5% of respondents is able to answer all the advance literacy questions correctly, while the fraction of incorrect responses and do not know is hugely deviated. There are 20.8% of respondents had answered zero incorrectness, but 0.4% had all incorrect answers. In terms of do not know, there are still 2.8% of respondents had filled all do not know. This small fraction implies that our adopted strategy from second pilot study was working well.

11 Table 4 Advance Financial Literacy Panel A reports the proportion of respondents answering correct, incorrect, and don t know questions to each advance financial literacy items. Panel B depicts the distribution of the number correct, incorrect, and don t know to each advance financial literacy items Panel A: Weighted percentages of total respondents (N=465) Correct Incorrect Don't Know Which of the following statements describes the main function of the stock market? If somebody buys the stock of firm XYZ in the stock market, Which of the following statements is correct? Which of the following statements is correct? What happen If somebody buys a bond of firm XYZ Which asset normally gives the highest return in long term (10-20 years)? Which asset displays the highest fluctuations over time? When an investor spreads his money among different assets, does the risk of losing money: If you buy a 10-year bond, it means you cannot sell it after 5 years without incurring a major penalty Stocks are normally riskier than bonds Buying a company stock usually provides a safer return than a stock mutual fund If the interest rate falls, what should happen to bond prices? Panel B:Summary of Advance Financial Literacy Response Weighted percentages of correct, incorrect, and "don't know" (N=465) Number of correct, incorrect, and don't know out of 11 questions None All Correct Incorrect Don't Know

12 4.3 Demography Profile of Financial Literacy We report the distribution of the financial literacy measure across demography profiles such as education, age, and gender in table 5. As expected, we found that the first and second quartile of each subgroups in basic financial literacy have increased in the first and second quartile of each subgroups in advance financial literacy. This implies that more people cannot answer advance literacy questions compared to answering basic literacy questions. This is supported by the findings that the third and fourth quartiles of each subgroup in basic have decreased in the third and fourth quartiles of each advance financial literacy subgroup. Panel A reports that basic financial literacy increases strongly with education. Those with low level of education (high school and below) are concentrated in first and second quartile. Meanwhile, those with postgraduate background are concentrated in third and fourth quartile. This is in line with prior research such Agarwal et al (2009) and van Rooij et al (2011) which documented higher education is associated with higher financial literacy. In regards of age, the profile of basic financial literacy has a parabolic shape. Most of respondents who can answer the basic financial literacy are those who are in the age group of years old. Interestingly, those who just newly entered the labour market (age group of 21-30) and those who just entered retirement (age group of more than 60 years old) are concentrated on the low quartile. It supports Lusardi and Mitchell (2007a, b) hypothesis, which is most of young people and retired person, have a low financial literacy leading to bad personal finance. Panel A of this table also documented that there are large gender difference in basic literacy where man display much higher basic knowledge than women. This result is consistent with Lusardi and Mitchell (2008) and van Rooij et al (2011). The advance financial literacy is shown in Panel B of Table 5. The findings in this panel support our basic financial demography findings. Again we find a strong relationship between advance financial literacy and education level. There is 48.8% of postgraduate holder in the fourth quartile compared to only 5.5% and 37.6% of high school and bachelor degree respectively. As we move the quartiles to lower level, the proportion of respondent with high levels of education decreases. Postgraduate holders are only 6.5% in first quartile compared to high school background respondents are 50.6%. Panel B showed also that advance financial literacy among the young is low. The highest belongs to mid-age respondents (41-50 years old) by concentrating as the highest in the fourth quartile. The distribution has a hump shape implying people may be learning as they age increases. Yet, when it touches retired age (50s years old), their knowledge about advance finance decreases. Lastly, a large percentage of women shows low literacy where 36.6% of women in the first quartile, and only 10.8% of women in the fourth quartile. Meanwhile, men are 18.2% in the first quartile and 35.4% in the fourth quartile.

13 Table 5 Demography Profiles of Basic and Advance Financial Literacy This table consists of two panels: Panel A and Panel B showing quartile for each subgroup of education, age, and gender. First quartile indicates the first 25% with lowest mark and fourth quartile indicates the last 25% with the highest mark. Panel A reports the distribution of the basic literacy measure, and Panel B shows the distribution of the advance literacy. We group the demography based on its quartile. The table shows weighted percentage. Panel A: Basic Financial Literacy Education profile on basic financial literacy 1st 25% 2 (low) 3 rd 4th 25% (High) Mean High School and Lower Bachelor Degree Postgraduate and Higher Age profile on basic financial literacy 1st 25% (low) 2 nd 3rd 4th 25% (High) years years years years > 60 years Gender profile on advance financial literacy 1st 25% (low) 2 nd 3rd 4th 25% (High) Male Female Panel B: Advance Financial Literacy Education profile on advance financial literacy 1st 25% (low) 2 nd 3rd 4th 25% (High) High School and Lower Bachelor Degree Postgraduate and Higher Age profile on advance financial literacy 1st 25% (low) 2 nd 3rd 4th 25% (High) years years years years > 60 years Gender profile on advance financial literacy 1st 25% (low) 2 nd 3rd 4th 25% (High) Mean Mean Mean Mean Mean Male Female

14 4.4 Financial Literacy and Retirement Planning We devised a combination of basic financial literacy and advance financial literacy into a single index of financial literacy. We did the first order mechanism by taking the average of all means from 16 items. Indeed, we performed another factor analysis, and found there is no violation of validty of items. Yet, to make our research more robust, we keep our basic literacy model and advance financial literacy model and compared it with that literacy index result. The first, second, and third model are our baseline models. Meanwhile, the fourth, fifth, and sixth models are our moderated models. As mentioned before, an important puzzle in the literature is whether financial education plays important role on those relationships. Therefore, we introduce financial education as the moderating variable. Therefore, we did not only run a regression analysis to reveal the significant factor of retirement planning and to examine whether financial literacy is the main predictor for retirement planning, but also we test the moderating role of financial education. Note that prior research such Benjamin et al (2006), Kezdi and Willis (2008), Stango and Zinman (2009), and van Rooij et al (20011) address an issue that whether financial literacy measures the knwoeldege or simply cognition and logic. This distinction has important implication for public policy such as financial education programs. Malaysian government emphasizes to give financial education to their citizen in regards of improving their personal finance. Therefore, it is important for us to add this variable and test it as moderating role. Firstly, we test those independent variables with basic financial literacy and advance financial literacy. Then, it is followed by the first-order of financial literacy where we combine the basic and advance financial literacy as one index. We divide our analysis into three main models. The first three models are estimation model without financial education. Meanwhile, the last three models (model 4 to model 6) have financial education as moderating variables. Overall, we have six estimation models as shown in Table 6. Model (1) estimated that all socio-demography factors did not contribute significantly on retirement planning except for gender and education. Gender has significant effect on retirement planning with a coefficient value of The positive sign on the coefficient implies that male has more concerns about retirement planning than women. This is in line with prior findings such Lusardi and Mitchell (2008). Education level has been found to be another important factor for retirement planning, where its coefficient value was This implies that the higher education of an individual, the higher retirement planning is. This is consistent with Bernheim (1998), Bernheim et al (2001), and Lusardi and Mitchell (2007b). Surprisingly, the basic financial literacy has no significant effect on retirement planning. The coefficient values are big: and for Model (1) and Model (4) respectively. This is contrary with Bernheim (1998) and Lusardi and Mitchell (2007a,b), yet it is in line with van Rooij et al (2001). The rationale is straightforward. Basic financial literacy may fall more on cognition/logic rather than knowledge. The ability to know whether our money depreciated due to inflation, or amount received in future due to interest is more likely to be cognition. This is consistent with prior research such Benjamin et al (2006) and Kezdi and Willis (2008) who argue that basic literacy question is ineffective as a measurement of financial knowledge because it is only a simple calculation that emphasize more on

15 mathematic. The philosophy of finance such as risk and return, portfolio diversification, or time value of money is not embedded on such question. The advance financial literacy results are shown encouraging findings and answering the doubt of basic financial literacy. It is noteworthy that advance financial literacy is more sophisticated by exploring the real financial knowledge. The findings show that there are significant relationships between advance and retirement planning in Model (2) and Model (5) with the coefficient value of and at 5% significance level. This implies that a person with more advance knowledge about finance will have better retirement planning. Our result suggests that Malaysian government should emphasize in encouraging advance financial knowledge rather than basic financial for better retirement planning of their citizens. We continue the investigation by introducing financial education as moderating variable. Model (4), (5), and (6) reported that financial education plays significant role on the retirement planning model. Firstly, the financial education has significant effect on retirement planning. This is in line with our education level variable. Those who have financial education may have better retirement planning. This is shown by the significant value of the coefficient 0.597, 0.733, and for Model (4), (5), and (6) respectively at 1% significance level. We further interact financial education with the literacy level, and found that there are significant effects of the interactive variable on retirement planning; an indication of moderating role. The coefficient values are slightly small where there are 0.085, 0.069, and for Model (4), (5), and (6) respectively, and the significant levels are 5% for Model (4) and (5), and 1% for Model (6). This findings implies that no matter it is basic, advance, or combined, financial education may contribute significantly of their role on retirement planning. This is tally with Moore (2003) and Lusardi (2004) who argued that retirement planning is closely related to the knowledge of personal finance. In a nutshell, our findings documented five important results. First, it is only gender and education level which have significant contribution on retirement planning. Others such age, occupation, and marital status do not have significant effects. Second, basic financial literacy does not contribute significantly on retirement planning. It means that whether people have robust knowledge of basic finance or low level knowledge of basic finance, it would not affect the retirement planning. Third, advance finance is important for retirement planning. People with better advance finance may have better retirement planning. Lastly, the financial education plays as moderator on the retirement planning model. There is significant different of effect between those who have financial education and those who do not have financial education towards retirement planning.

16 Table 6 Multivariate Analysis of Retirement Planning This table reports OLS regression estimates of the effects of financial literacy, financial education, and several control variables on retirement planning. The value inside the parenthesis is standard error, other values is coefficient value. *,**, and *** denote statistical significance at 10%, 5%, and 1% level. The classic assumption such Normality, Heterokedasticity, Autocorrelation, and Multicollinearity have been run through before running the estimations. Model (1) Model (2) Model (3) Model (4) Model (5) Model (6) Basic Literacy (BL) (0.27) (0.36) Advance Literacy (AL) 0.155** 0.107** (0.074) (0.049) Financial Literacy (FL) 0.088*** 0.062*** (0.011) (0.012) Age (0.092) (0.13) (0.092) (0.0954) Gender 0.139** 0.294*** 0.129** 0.119** 0.233** 0.237** (0.068) (0.082) (0.063) (0.058) (0.094) (0.104) Marital Status (0.104) (0.184) (0.079) (0.104) (0.185) (0.077) Occupation (0.058) (0.056) (0.057) (0.058) (0.058) (0.057) Education 0.207*** 0.300*** 0.357*** 0.221*** 0.322*** 0.406*** (0.057) (0.077) (0.08) (0.064) (0.081) (0.08) Financial Education (FE) 0.597*** 0.733*** 0.611*** (0.203) (0.218) (0.209) Constant 0.752*** 0.76** 0.664*** 0.76*** 0.755*** 0.657** (0.25) (0.29) (0.26) (0.25) (0.28) (0.26) Moderating effects BL*FE 0.085** (0.036) AL*FE 0.069** (0.027) FL*FE 0.078*** (0.025) R-Squared

17 5. Conclusion The survey of financial literacy has been extensively investigated in many developed countries (e.g. Bernheim, 1998; Moore, 2003; Miles, 2004; Christelis et al, 2005; Lusardi and Mitchell, 2007a,b), yet, it is very rare to found empirical investigation in developing countries context, including Malaysia. Those previous studies conclude that consumers are poorly informed about financial practices such retirement planning. This issue would create further problem, in that financial illiteracy my stunt peoples ability to save their money for retirement, undermining their well-being in old age. This financial illiteracy is also important because if the financial illiteracy is concentrated in marginal population subgroups (low income and low education), it may lead them to worse life situation and may render them most vulnerable to economic hardship in retirement. Malaysia is no exception for this matter. With a growing middle class group, emerging human development index, and steady economic growth, it is important to look at how financial literacy plays its role on the retirement planning. A HSBC report entitled The Future of Retirement, an Balancing Act documented that Malaysians were the highest in Asia (28%) to say that ability to save for retirement was impacted by debt due the bad financial planning 2. Malaysian Employee Provident Fund has found that most Malaysians do not give any thought to retirement even if they are retiring in five to 10 years, and this agency argue that the reason is due to the lack of financial literacy 3. Hence, it is urgent to investigate whether financial literacy plays important role on retirement planning. The finding that retirement planning has significantly associated with gender and education suggesting that education is an important factor to encourage better retirement planning. This implies that it is important for Malaysian government to enhance their human development for having better retirement planning. Further, the gender and retirement planning indicate that Malaysian government may target certain group of gender as the focus of their retirement planning education. While other empirical findings address financial literacy as solution for retirement planning, this research found that the conclusion may mislead. Our research found basic financial literacy may not give any impact to the retirement planning. In other words, those basic finance things which can be reached by logic are not an important factor for a person to plan his/her retirement. Interestingly, our research found it is the advance financial literacy that may lead to better retirement planning. The Malaysian government may embed the advance financial literacy items in their education program to promote better retirement planning. Lastly, our research shows that financial education can moderate the significant role of socio demography and financial literacy on retirement planning. In other words, Malaysian government may establish a course or seminar of finance to their citizens in regards of better retirement planning. This is in line with the suggestion of prior research in this topic such as Moore (2003) and Lusardi (2004). In addition, this research may contribute to the body of knowledge as the benchmark for developing countries context. Acknowledgement This research is funded by UNIMAS Small Grant Scheme F01(s144)/1174/2014(09) 2 See 3 See

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