Financial Preparation for Retirement: Factors Affecting Retirement Preparation Through Employer Sponsored Retirement Plans

Abstract

This study examines the effect of various social, demographic, and economic variables on retirement preparation and discusses ways in which policy makers can use this information to mandate legislation that will motivate individuals to save for retirement. Using data from the Survey of Consumer Finances, probit analysis indicates that respondents' income and job tenure have significant positive effects on predicting employer sponsored pension plan eligibility. Conversely, the findings do not support the assumption that the probability of pension plan eligibility increases with age and education levels. In addition, we did not find race, marital status or home ownership to be significant factors in pension plan eligibility. Regarding contributions to pension plans, the findings indicate that income, education and net worth have significant positive effects on whether or not an individual is contributing to a plan. Conversely, the findings regarding household size were significant and negative regarding the contribution decision. Race, health, and an individual's savings habits do not appear to have significant effects on the decision to contribute to employer sponsored pension plans. Additional findings; however, indicate that individuals who report the reason for saving is retirement are more likely to contribute to their pension plans. Finally, the results regarding future expectations for the economy were insignificant in relation to whether or not an individual was contributing to his or her pension plan. The findings may be used to aid policy makers in targeting particular groups of individuals to motivate them to contribute to their company sponsored retirement plans. Policies that encourage retirement planning education programs as well as tax credits on contributions made by individuals in the lower and middle income tax brackets are just a couple of suggestions that could motivate specific groups of individuals to save for retirement.