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Financial education Updated: 19 Sep 2019

What's needed for adequate retirement planning?

One would think that a good financial education, in and of itself, would be enough to properly plan for retirement. However, research conducted by the Mexican Association of Pension Fund Managers (AMAFORE) and supervised by Jean Paul Madrigal, reveals something more is needed. The BBVA Center for Education and Financial Capabilities awarded this retirement planning research project one of its inaugural BBVA EduFin Research Grants.

In 2018, the BBVA Center for Education and Financial Capabilities announced the inaugural BBVA EduFin Grants. Each year these grants are earmarked for researchers, university academics, research institutions, and centers of study with the goal of supporting and financing a select group of research projects that address topics related to financial education worldwide.

The inaugural round of grants has come to an end, and after a year of work, the five grant-winning research finalists have completed their research, which will be published on the Center’s website. The first of these research projects, carried out by the AMAFORE research team composed of Jean Paul Madrigal, Asunción González, and Cecilia Gómez, looked to tackle a global problem: the lack of sufficient financial retirement planning both in the formal and informal sectors.

Global Reach

Retirement preparedness continues to be an internationally unresolved issue, despite a globally aging population. According to data from the United Nations Population Fund (UNPF) and HelpAge International — data that is outlined by the AMAFORE researchers — every two seconds, somewhere on the planet, two people celebrate their 60th birthday. At this rate, it is expected that by 2050 there will be approximately 2 billion elderly people, representing 22 percent of the world's population, equivalent to almost double today's figure, which stands at 11.5 percent. "Economic security in old age is certainly a global challenge," Madrigal asserts in the study.

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In Mexico in 2014, AMAFORE conducted a comparative study that identified it as the country least prepared for retirement. "Mexico presents a challenging landscape, combining the lowest levels of financial preparedness for retirement with a social security system that forecasts very modest replacement rates,” according to Madrigal. Faced with this scenario, the research team sought to analyze potential solutions to this problem: "The adequacy of financial education in retirement planning: a pilot study of the working population."

Is financial education sufficient to ensure better decision-making when planning for retirement? According to the research, this kind of knowledge is a “significant ally” in nurturing general habits to increase savings, given that the most financially educated people, save the most. However, things are very different when it comes to saving for retirement. "The Mexican perspective about the issue can be defined as a paradox between growing awareness and concern about retirement planning and a shortage of specific actions to take", the study states. The reason lies in the fact that retirement and old age are viewed as "an unwanted, distant stage, which is best not to think about."

Emotion vs. reason

This research was conducted using the randomized controlled trial (RTC) methodology with a sample of 150 working people, resident in Mexico City, and between 20 and 40 years old. This sample was selected for two reasons: "First of all, retirement is a more significant concern for those people who are actively involved in the workforce. Secondly, financial preparation for retirement is a greater challenge among younger people, even though they are the ones who have the time to prepare for it.” The team recognizes that the results of their research should be taken in light of the fact that the sample primarily consisted of an urban population.

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Participants were exposed to different procedures, which sought to encourage financial preparation for retirement. The goal was to identify effective strategies that contribute to the further design of new solutions. The analysis in the first stage of the research study concluded: it is not possible to validate a significant relationship between financial education and financial preparation for retirement. Reversing this situation requires "a process of awareness, which allows retirement and old age to be understood simply as a phase of change — not necessarily of uncertainty — for which timely preparation is important."

Two awareness-raising strategies — one rational and the other emotional — were developed and deployed with the objective of stimulating financial planning for retirement. The first, based on acquiring knowledge, was effective at producing concrete actions, whereas the second stimulated positive attitudes about retirement and aging.

The effectiveness of one versus the other, however, depended on another important factor: "The emotional procedure seems to be more successful among workers in the informal segment, whereas the rational procedure is better received by workers in the formal sector.” This conclusion gives cause for reflection: institutional factors should also be considered in strategies aiming to encourage populations to better prepare financially for their future.

The importance of action

In addition to identifying that a combination of emotional and rational factors need to be incorporated into retirement-focused financial education strategies, the research also revealed that although financial education is essential, "it is unproductive to expect people on their own to associate concepts, tools, and financial habits that they use in their daily lives with the need to prepare for retirement."

Establishing a process of awareness that links financial education with retirement preparation is fundamental in order to contribute to a more financially secure future. This process, supported by national institutions, needs to combine rational factors focusing on financial education with emotional factors that serve to change attitudes about old age and retirement. People will thus be better informed and will be able to take the steps they need to appropriately plan for retirement.

If you would like to read the full study, click here.