Financial knowledge overconfidence and early withdrawals from retirement accounts

Abstract

Early distributions from retirement accounts could endanger future retirement income security, and the U.S. has restrictions to discourage them, including possible tax penalties. On the other hand, tapping one's retirement assets may be rational when an individual encounters financial hardship. With the 2020 Coronavirus Aid, Relief, and Economic Security Act, early distribution from retirement accounts became an even more attractive option to individuals. In this study, we examined factors related to individuals' decision of taking hardship withdrawals and plan loans, focusing on financial knowledge and overconfidence in financial knowledge, using the 2018 National Financial Capability Study dataset. We found evidence that people may be making early withdrawals without understanding possible consequences. Objective financial knowledge was negatively related to hardship withdrawals and plan loans, but the subjective assessment of financial knowledge was positively related to hardship withdrawals. Respondents with financial knowledge overconfidence (high subjective and low objective knowledge) were more likely to take early withdrawals than those with other combinations of objective and subjective knowledge. We discuss implications for public policy and financial education and advice.

Determinants of early-access to retirement savings: Lessons from the COVID-19 pandemic

“…Outside of these specific features of the scheme, it is possible that the complexity of carefully weighing up the pros and cons of a withdrawal could lead some people to choices driven by information overload ( Briere et al, 2021 ), financial knowledge overconfidence ( Lee and Hanna, 2020 ), a collapse of trust in savings institutions (Lopez and Rosas, 2022) 19 or the influence of political risk ( Kay and Borzutzky, 2022 ). We did not measure any of these characteristics in our study so leave such questions to future research – should the (unfortunate) opportunity arise.…”

Exploring the interplay of financial literacy and financial well-being: Insights and strategies for augmenting overall financial satisfaction

“…Those who lack financial literacy are more likely to take withdrawals from their pension funds (Lee and Hanna, 2020).…”

How Overconfident Financial Knowledge Hinders Retirement Planning? Mediating Analysis and Heterogeneity of Retirement Funding Sources

“…This conclusion is generally accepted by most studies. To verify this standpoint, taking advantage of data collected by National Financial Capability Study in 2018, S. T. Lee and Hanna (2020) examined this topic and believed consumers who are overconfident in financial knowledge tend to withdraw money from their retirement accounts upfront because they are not fully aware of the consequences of such financial behavior leading to leakage of retirement assets. Moreover, financial overconfidence makes it hard for young consumers to accurately anticipate future retirement costs, discouraging them from preparing for retirement economic sources (Richardson et al, 2022).…”