June 08, 2005

LOS ANGELES—A recent survey on retirement savings conducted by three UCLA undergraduate students presents a surprising revelation about young adults and their conceptions of personal finance.  Results from the survey of 100 UCLA undergraduates revealed that given today's economic conditions, college graduates, due to lack of basic investing knowledge, might not be sufficiently prepared to handle the financial aspects of retirement planning when they enter the workforce.

When asked which of three statements best describes a bond, here is how the students responded:

  • 42 percent chose:  An I.O.U. from your brokerage firm promising to yield a certain return on your investment over the long term.
  • 29 percent chose:  Stock in a company that is less risky than that of the overall stock market. 
  • 29 percent also chose the correct answer:  A type of loan in which the borrower promises to pay a certain amount of interest each year until the loan is paid in full.

“We were amazed at the results,” said Jenny Blake, a fourth-year political science and communications studies major at UCLA, who conducted the survey with fellow UCLA students Beau Gillman, a freshman economics major, and Kellen Herrera, a freshman physics major and accounting minor.

“Keep in mind that if students were to guess randomly—as many admitted doing—they would be right 33 percent of the time,” added Herrera.

The three students conducted the survey as part of an assignment for a UCLA Fiat Lux Seminar on the Psychology of Investing.  UCLA’s Fiat Lux Seminars provide valuable forums for students and faculty to engage in critical thinking together.  Students discover how to learn through dialogue not only with the seminar instructor, but also with each other. 

Another question asked students to describe a Roth IRA account, which is a popular investment vehicle for young workers saving for retirement.  Here is how they decided among three choices:

  • 42 percent chose:  An account where you pay taxes on withdrawals but not contributions.
  • 28 percent chose:  An account through your company, which may or may not match your contributions.
  • 30 percent chose the correct answer:  An account where you pay taxes on contributions but not withdrawals.

“By investigating the issue of retirement savings among our peers, we had an opportunity to explore one of the numerous paths to knowledge pursued at a major research university like UCLA,” noted Gillman.  “In the process, we’ve helped ourselves and our fellow students understand the need and urgency to become investment savvy.”

The issue of retirement savings for young adults is especially timely given this time of year when thousands of high school and college students prepare to graduate and enter the workforce.  This issue is further exacerbated by United Airlines' recent decision to turn over its pension plans to the Federal government and by the Bush administration's ongoing push to partially privatize Social Security.

The UCLA Student Survey on Retirement Savings suggests that the President's controversial plan, which would enable wage earners to invest a portion of their payroll taxes into private retirement accounts, would not bode well for most students graduating today, as they lack adequate financial education.

When asked at what age people should start saving for retirement, here’s how the 100 UCLA students responded:

  • 40 percent chose: 30-34 years old
  • 22 percent chose: 25-29 years old
  • 27 percent chose: 20-24
  • 10 percent chose: over 35 years old

When asked when they themselves would start saving for retirement, some 23 percent of the students said they would wait until they were over the age of 35.  According to the three students who conducted the survey, those respondents could likely suffer serious shortcomings in their retirement savings by not taking advantage of the benefits of compound interest.  They noted that someone who invests $3,000 a year, starting at age 30, with an average 10 percent rate of return on their investment would accumulate approximately $987,000 at age 65. If they started 10 years earlier, they would retire with about $2.6 million.

A majority of the respondents had clear misconceptions of Social Security.  Here’s what respondents thought the Federal government safety net would provide them in retirement:

  • 50 percent expect Social Security to provide over 20 percent of their retirement income
  • 51 percent expect Social Security to provide 0-19 percent of their retirement income
  • 35 percent expect Social Security to provide 20-39 percent of their retirement income
  • 14 percent expect Social Security to provide more than 60 percent of their retirement income

“The expectations of these students are unrealistic, given that the average Social Security check totals a little over $8,000 a year,” said UCLA Anderson School of Management professor Shlomo Benartzi, a renowned expert in pension plans and 401 (k)s who led the Fiat Lux Seminar on the Psychology of Investing.  “I hope the efforts of these students and their ongoing dialogue will help them and their peers better prepare for their financial futures.”

Through research he has conducted with a colleague, Prof. Benartzi, who also serves as co-chair of the Behavioral Decision Making Group at UCLA Anderson School of Management, has identified some ways to help individuals save more of their income in retirement accounts and to better diversify their retirement accounts. His award-winning research investigates participant behavior in defined contribution plans, such as 401 (k)s and 403 (b)s.
“In exploring these issues, the students really bring to light the shortcomings in investment knowledge that perpetuate in our society,” added Benartzi.

About UCLA
California’s largest university, UCLA enrolls approximately 38,000 students per year and offers degrees from the UCLA College and 11 professional schools in dozens of varied disciplines. UCLA consistently ranks among the top five universities and colleges nationwide in total research-and-development spending and receives more than $750 million a year in research contracts and federal and state grants. For every $1 state taxpayers invest in UCLA, the university generates almost $9 in economic activity, resulting in an annual $6 billion economic impact on the Greater Los Angeles region. The university’s health care network treats 450,000 patients per year. UCLA employs more than 27,000 faculty and staff, and has been home to five Nobel Prize recipients.

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