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Believing in your financial smarts may be key to a secure retirement

A study finds that financial confidence is a big help

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Mark Huffman
Reporter

Mark Huffman has covered consumer issues since 2004, with a special focus on protecting and empowering older adults. A former news correspondent for the Associated Press Radio Network, Westwood One, and ConsumerAffairs, Mark brings decades of journalistic experience to RetirementLiving.com. He is passionate about giving consumers a voice and helping them make informed decisions. Mark has also created educational content, including Senior Scam Alert, a video resource designed to help seniors recognize and avoid fraud. He holds a B.A. from the University of Kentucky and lives with his family in Richmond, Virginia.

Photo by Towfiqu barbhuiya on Unsplash

Key Insights

  • Believing you’re financially savvy may be more important than actually being financially literate when it comes to retirement readiness.
  • Subjective financial knowledge (SFK) strongly influences risk tolerance and retirement confidence — even more than objective knowledge.
  • Building confidence in money management could be as critical as teaching financial facts.

Many people enter retirement with a 401(k) but not a lot of experience actually managing money. A new study suggests that’s not a problem, as long as you feel confident about your strategy.

The research introduces a concept called Subjective Financial Knowledge (SFK), defined as a person’s belief in their financial knowledge, and it plays a critical role in shaping both risk tolerance and confidence in retirement savings. 

According to Ramesh Rao, McDermott Centennial Chair in Banking and Finance at Texas McCombs, and co-authors Congrong Ouyang (Texas A&M University) and Khurram Naveed (College for Financial Planning), people with higher SFK are more comfortable with financial risks and more likely to believe they’ve saved enough for retirement — regardless of their objective financial knowledge.

A shift in philosophy

Traditionally, financial literacy programs have emphasized facts: how compound interest works, how to budget, and how to navigate 401(k) accounts. Rao’s findings suggest that such efforts may be insufficient without addressing the psychological aspect of financial decision-making. 

Confidence, he argues, is a critical driver.

“Our basic idea is that people’s actions are driven by what they believe,” he said. “It shifts the focus from reality to perceptions of reality.”

This insight could be transformative. If boosting financial confidence, not just competence, encourages earlier and better retirement planning, educational programs might be redesigned to also reinforce mindset and self-belief.

Data-driven insights

The study analyzed data from the 2022 Survey of Consumer Finance, examining responses from over 3,200 working adults. Participants rated their perceived financial knowledge (SFK), risk tolerance, and retirement readiness on numerical scales.

Key findings include:

  • Only 35% of participants were satisfied or very satisfied with their retirement savings.
  • Higher financial risk tolerance increased perceptions of retirement adequacy by an average of 0.54 points on a 1-to-5 scale.
  • Remarkably, SFK explained 40% of the relationship between risk tolerance and confidence in retirement savings — a “very, very strong effect,” according to Rao.

Even after controlling for demographic factors like income, education, and health, SFK remained a major influence.

With the decline of traditional pension funds and the rise in life expectancy, individuals are increasingly responsible for their own retirement savings. Yet many are falling short, often due to a lack of initiative rather than a lack of access to information.

“There’s a major crisis in America,” Rao warns. “People are living much longer, and they’re not saving enough for retirement.” 

He believes that helping people feel more confident in their ability to manage money — especially those from lower-income or less-educated backgrounds — could be a powerful solution.