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«FIVE STEPS TO PLANNING SUCCESS. EXPERIMENTAL EVIDENCE FROM U.S. HOUSEHOLDS Aileen Heinberg, Angela Hung, Arie Kapteyn, Annamaria Lusardi, Anya ...»

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Appendix A: Financial Literacy Baseline Survey Today we would like to ask you some questions about financial decision making. You may have previously answered a number of questions that you will be asked today. Please answer all the questions you are asked to the best of your ability, even if you have seen them before. We are very interested in your responses, as some of your information and perceptions may have changed. Thank you!

CI1 self-efficacy about interest rates When making decisions about personal finances, how likely is it that you would be able to effectively take into account the impact of interest compounding?

1 Extremely likely 2 Very likely 3 Somewhat likely 4 Very unlikely 5 Extremely unlikely CI2 knowledge of interest on interest Suppose you put $1,000 in an account that earns 5% interest per year, every year. You never invest additional money and you never withdraw money or interest payments. So in the first year, you earn $50 in interest. In Year 4, how much will this account earn?

1 Less than $50 2 $50 3 More than $50 4 Don't know CI3 knowledge of 7 and 10 rule Suppose you invest $2,500 and earn 7% per year on this investment. How many years will it take for your total investment to be worth $5,000?

1 Between 0 and 5 years 2 Between 5 and 15 years 3 Between 15 and 45 years 4 More than 45 years 5 Don't know CI4 behavior regarding earning over time Consider the following scenario: Jack and Jill are twins. At the age of 20, Jack started contributing $20 a month to a savings account. After 20 years, at the age of 40, he stopped adding to his savings, but he left the money in the account.

Jill didn’t start to save until she was

40. Then, she saved $20 a month until she retired 20 years later at age 60. Suppose both Jack and Jill earned 6% interest per year on their savings. When they both retired at age 60, who had more money?

1 Jack 2 Jill 3 They had the same amount 4 Don't know CI5 behavior regarding earning interest on interest Pam is deciding between 2 options: Option A:

- Invest $1,000 in a certificate of deposit that earns 5% interest. - Pam would not add or remove any money from this investment for the next 30 years. Option B:

- Invest $1,000 in a savings account that earns 5% interest.- Move the interest earned on this account every year into a safe at home.- Pam would not add or remove any other money from the savings account or the safe for the next 30 years. At the end of 30 years, which of these options would provide the most money?

1 Option A 2 Option B 3 Pam will have the same amount of money at the end of 30 years regardless of whether she chooses Option A or Option B.

4 Don't know I1 self-efficacy about inflation When making decisions about personal finances, how likely is it that you would be able to effectively take into account the impact of inflation?

1 Extremely likely 2 Very likely 3 Somewhat likely 4 Very unlikely 5 Extremely unlikely I2 knowledge of inflation Suppose that by the year 2020 your income has doubled and prices of all goods have doubled too. In 2020, how much will you be able to buy with your 2020 income?

1 More than today 2 The same amount as today 3 Less than today 4 Don't know I3 behavior regarding inflation Rita must choose between two job offers. She wants to select the job with a salary that will afford her the higher standard of living for the next few years. Job A offers a 3% raise every year, while Job B will not provide a raise for the next few years. If Rita chooses Job A, she will live in City A. If Rita chooses Job B, she will live in City B. Rita finds that the price of goods and services today are about the same in both areas. Prices are expected to rise, however, by 4% in City A every year, and stay the same in City B. Based on her concerns about standard of living, what should Rita do?

1 Take Job A 2 Take Job B 3 Take either one: she will be able to afford the same future standard of living in both places 4 Don't know RD1 self-efficacy about risk diversification When making decisions about personal finances, how likely is it that you would be able to effectively select a mix of investments that reflected your preferred level of risk?

1 Extremely likely 2 Very likely 3 Somewhat likely 4 Very unlikely 5 Extremely unlikely RD2 knowledge of relationship between risk and return In general, investments that are riskier tend to provide higher returns over time than investments with less risk.

1 True 2 False 3 Don't know RD3 knowledge of risk diversification Which of the following is an accurate statement about investment returns?

1 Usually, investing $5,000 in shares of a single company is safer than investing $5,000 in a fund which invests in shares of many companies in multiple industries.

2 Usually, investing $5,000 in shares of a single company is less safe than investing $5,000 in a fund which invests in shares of many companies in different industries.

3 Usually, investing $5,000 in shares of a single company is equally as safe as investing $5,000 in a fund which invests in shares of many companies in different industries.

4 Don't know RD4 behavior regarding risk diversification Suppose you are a member of a stock investment club. This year, the club has about $200,000 to invest in stocks and the members prefer not to take a lot of risk. Which of the following strategies would you recommend to your fellow members?





1 Put all of the money in one stock 2 Put all of the money in two stocks 3 Put all of the money in a stock indexed fund that tracks the behavior of 500 large firms in the United States 4 Don't know TF1 self-efficacy about tax-favored assets When making decisions about personal finances, how likely is it that you would be able to effectively take advantage of tax-favored investment options available to you?

1 Extremely likely 2 Very likely 3 Somewhat likely 4 Very unlikely 5 Extremely unlikely TF2 knowledge of 401(k) taxes When you invest in an employer's retirement savings plan such as a 401(k), your contributions

are taxed:

1 Either before you invest them or when you withdraw them during retirement, but not both times.

2 Both before you invest them and when you withdraw them during retirement.

3 Once a year on or before April 15.

4 When you reach age 65.

5 Don't know TF3 knowledge of employer independence Both Irene and her employer contribute every year to her employer-sponsored 401(k) plan. Irene has worked at the company for twenty years, and is fully vested in her plan. Suppose Irene leaves her job or gets fired. Which of the following statements is true?

1 If she is no longer working for the company, the whole plan balance is forfeited, because her benefits are tied to her job.

2 If she gets fired, the company has the right to decide how much of her total plan balance she will get.

3 If she voluntarily leaves her job, she forfeits all of her employer's contributions.

4 Even if she leaves her job or gets fired, she is still entitled to the entire plan balance.

5 Don't know TF4 knowledge of avoiding double taxation Which of the following statements are true?

1 In any type of IRA or 401(k) account, all of the money in your account grows tax-free.

2 If you have a traditional IRA or 401(k), you make contributions out of pre-tax income and pay income tax at your future tax rate when you withdraw the funds.

3 Both are true 4 Don't know TF5 behavior regarding time and rate of taxation This year, Marge’s salary is $100,000 and she contributes $10,000 of her salary to a traditional 401(k) offered by her employer. Her current tax rate is 28%. In 40 years, when Marge retires, the money will have grown to $160,000. Her tax rate during retirement will fall to 20%. Which of the following is true?

1 This year, Marge should pay income taxes on her entire salary. During retirement, she will pay 20% tax on whatever she withdraws from her plan.

2 This year, Marge should pay income taxes on only $90,000. During retirement, she will pay the same deferred 28% tax rate on whatever she withdraws from her plan.

3 This year, Marge should pay income taxes on only $90,000. During retirement, she will pay 20% tax on whatever she withdraws from her plan.

4 This year, Marge should pay income taxes on only $90,000. During retirement, she will pay no tax on whatever

she withdraws from her plan.5 Don't know

TF6 behavior regarding assorted 401(k) attributes Which of the following is a true statement?

1 You will lose money that you personally invested in your 401(k) if you switch jobs.

2 You will be charged income tax as well as tax on dividends and increases in the value of your stock if you invest through a 401(k).

3 Unless you are undergoing significant hardship, you cannot withdraw money from a 401(k) without penalty until you reach a certain age.

4 All of the above 5 Don't know EM1 self-efficacy about employer match When making decisions about personal finances, how likely is it that you would be able to effectively use information about employer 401(k) matches that was available to you?

1 Extremely likely 2 Very likely 3 Somewhat likely 4 Very unlikely 5 Extremely unlikely EM2 knowledge of match return equivalent Alice wants to invest $1,000 for retirement this year. Her new employer will fully match her 401(k) contributions, up to $10,000 per year. All else being equal, which of the following options will give Alice the highest total amount at the end of the year?

1 Alice contributes $1,000 to her 401(k) plan and invests that money in mutual fund A. At the end of the year, mutual fund A has earned a 5% return.

2 Alice does not contribute to her 401(k) plan but she invests $1,000 in mutual fund B outside of her 401(k) plan. At the end of the year, mutual fund B has earned a 20% return.

3 Alice does not contribute to her 401(k) plan, but she invests $1,000 in mutual fund A outside of her 401(k) plan. At the end of the year, mutual fund A has earned a 5% return.

4 Don't know EM3 knowledge of match maximization David’s new job offers a 401(k).

His employer provides a 50% match up to $2,000.

How much should David invest at least in order to obtain the maximum amount of money from the employer match?

1 $0 2 $500 3 $1,000 4 $2,000 5 $4,000 6 Don't know EM4 behavior regarding employer match You have decided to set aside 15% of your salary for retirement. You work at a firm where your employer matches your contribution to the 401(k) plan, dollar by dollar, up to 5% of your salary. Which of these statements is correct?

1 If you contribute up to 5% of your salary, the employer match is equivalent to a 100% return on your contribution.

2 What the employer contributes should not play any role in your decision.

3 It is always a good idea to contribute less than what the employer contributes.

4 Don't know Appendix B: The Narratives A Wedding Gift and Compound Interest Dave and Michelle met in college, five years ago.

Theirs isn’t a romantic story of love at first sight; instead they slowly built the foundation for a strong relationship. Dave asked Michelle out for a coffee, then another, and another. Their relationship continued to grow stronger, and they recently got married.

When they got $5000 in cash as wedding presents, Michelle and Dave had to decide what to do with the money.

The answer didn’t seem obvious.

Looking over their finances didn’t take long because they didn’t have much money, especially since Michelle’s job at the time paid more like an internship.

The two of them don’t generally consider themselves big planners and, at first, it seemed pointless to even think about investing for the long term. Dave suggested not investing right away, but instead waiting until they had better jobs and made more money.

But Michelle told Dave about the 7 and 10 rule. The rule describes how long it takes for an investment to double. At a 7% rate of return, it takes about 10 years for an investment to grow twice as large. At a 10% rate of return, it takes only about 7 years to double your money.

–  –  –

At first, Dave wondered whether they could get such a high return: 10% is a lot! Michelle pointed out that a 7% return might be more realistic. After all, they would be investing for the long term. Dave realized that over the long term a diversified portfolio of stocks can yield returns in that range, though both he and Michelle understand that it always varies.

The simple 7 and 10 rule helped Michelle figure out that even at a 7% rate of return, the original $5000 would grow to a whopping $160,000 by the time she and Dave turn 75. When Michelle first pointed this out to Dave, he thought something had to be wrong with Michelle’s calculation.

But, as Michelle explained to him, the money grows that much because the returns compound over time. In other words, all of the money, including the earned interest, gets reinvested every year so that over the long term, there’s some serious build-up!

–  –  –

which would double again by age 65 to around …$80,000 which would double again by age 75 to around...$160,000.

If Michelle and Dave waited until they were 55 years old to invest the $5,000 and earned the same 7% rate of return, they would end up with $20,000 by the time they were 75. And while $20,000 would be nice, the $160,000 they’d have if they invested right away would be even nicer.

Michelle also showed Dave the other half of the 7 and 10 rule. If their investments perform really well, their money could grow even faster. At a 10% rate of return, their investment would double in only 7 years. By the time Dave and Michelle reached their mid-70s, their $5000 would double a whole bunch of times and turn into $640,000!

Dave and Michelle decided to invest their $5,000 right away, giving it more time to grow. When their friends and family gave them $5000, they never imagined it could turn into six figures. But by applying the 7 and 10 rule, Dave and Michelle realized the money could turn into $160,000 or maybe even $640,000, for their future. Investing the money was the best wedding gift they could have given themselves!

Taking Advantage of Employer Matches



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