How prepared you are for retirement may depend, in part, on where you live. Two recent studies have found that people who reside in certain locations are significantly more prepared for retirement than those in others.
Residents of New Hampshire and Alaska have the best financial literacy and financial behavior, while residents of Louisiana and West Virginia rank at the bottom, according to a study released this week by the Employee Benefit Research Institute. “Some states consistently fare worse than others in terms of financial literacy and financial behavior,” says Sudipto Banerjee, an EBRI research associate and author of the report. “There might be something going on at the state level whereby individual financial literacy and financial behavior are being shaped not only by individual demographic characteristics but also by the state in which people live.”
Five multiple choice questions were used to asses financial literacy, including:
- "Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow?"
- “If interest rates rise, what will typically happen to bond prices?”
Five questions were also used to measure financial behavior, such as whether each respondent had an emergency fund, a saving or investment account, a credit report, access to professional financial or tax advice, and has tried to figure out how much to save for retirement.
New Hampshire residents were able to answer the most financial literacy questions correctly, and individuals in Alaska self-report the best financial behaviors, the EBRI analysis of FINRA Investor Education Foundation online survey responses from 28,146 adults found. Workers in New Hampshire, Minnesota, Idaho, Washington, Colorado, Wisconsin, Utah, Alaska, and Maryland appear in the top 15 of both rankings.
Residents of Louisiana were the least able to answer the financial literacy questions, and people in West Virginia say they are making the fewest financial preparations for retirement. Individuals in Louisiana, Mississippi, Arkansas, Tennessee, West Virginia, Alabama, Ohio, Kentucky, Texas, and Indiana are in the bottom 15 of both measures. “This means a large number of people in these states lack not only financial literacy but also good financial behavior,” according to the EBRI report. “The high concentration of the same states at the top and the bottom of both rankings indicates that there could be something going on at the state level that is causing some states to perform better than others.”
The study controlled for the age group, ethnicity, gender, education, income, marital status, and employment status of those surveyed and has implications for how prepared people in these states will be for retirement. “To navigate the path toward a comfortable retirement requires sound knowledge of financial basics and the existing investment choices, as well as the ability to understand and cope with the ever-changing set of financial instruments,” Banerjee writes.
Another survey released this week found that people in San Francisco, Sacramento, and San Diego are significantly more prepared for and confident about their retirement prospects than workers in Indianapolis, New York, and Atlanta, the lowest ranked cities. The Harris Interactive survey of 11,611 adults ages 40 to 75 in 30 metropolitan areas commissioned by Ameriprise Financial took into account each respondent’s saving habits, retirement needs calculations, confidence about achieving retirement goals, and whether people have planned activities for their retirement years.
San Francisco topped Ameriprise’s retirement preparedness ranking largely because the city’s residents have a positive outlook about retirement. The proportion of older San Francisco residents who say they feel happy (51 percent) and optimistic (42 percent) about their retirement prospects is significantly higher than the national average. And a third of Bay area residents report being confident their retirement will work out the way they planned, compared to 22 percent of older individuals nationwide.
Residents of Indianapolis, which Ameriprise ranked last among the 30 cities, generally have a pessimistic view of their ability to retire comfortably. Just 27 percent of Indianapolis residents report they feel hopeful about retirement, compared 33 percent of those surveyed nationwide. And only 13 percent of the survey respondents in Indianapolis say they believe they will be able to achieve their dreams in retirement.
The Ameriprise survey found that pessimism about retirement is increasing nationwide, with significantly more individuals than last year reporting that they feel worried, anxious, or depressed about retirement. Only 18 percent of the survey respondents in all locations say they are likely to achieve their retirement dreams, down from 21 percent in 2010.