1.

Literature review
1. Theoretical framework

Financial literacy is a concept that different researchers have attempted to define. The
concept was developed to measure the ability of individuals to make financial decisions.
Sandra (2010) defines financial literacy as an individual's ability and confidence to use his or
her financial knowledge to make a financial decision. CFI (2023) defines financial literacy as
the cognitive understanding of financial components and skills such as budgeting, investing,
borrowing, taxation, and personal finance. Financial literacy is the term used to describe the
combination of economic and theoretical knowledge employed in financial decision-making
(Mugerman, 2016).

Financial literacy is defined as having the knowledge and abilities to make sound financial
decisions. (Mustafa et al.,2023). Financial education is the process by which individuals
improve their understanding of financial products and concepts and develop the skills and
confidence to become more aware of financial risks and opportunities, make informed
choices, know where to go for help, and take other effective actions to improve their financial
well-being and protection through information, instruction, and/or objective advice. (OECD
2005). Financial literacy can be divided into five distinct components: (1) keeping track of
finances; (2) planning; (3) choosing financial products; (4) staying informed; and (5) financial
control (Anz, 2006).

Despite the various definitions and the lack of an academically accepted universal definition
of financial literacy, there are some notable similarities. For this reason, this paper defines
financial literacy as having the knowledge and ability to make sound financial decisions
(Wan Mashumi et al., 2023).

1. Financial literacy and retirement planning

Antoni et al. (2020) investigated the relationship between financial literacy and retirement
planning in Nelson Mandela Bay. A quantitative research design was implemented in 2020,
which used a closed-ended questionnaire to collect the primary data from the respondents.
A total of 122 government employees participated in the study. The sample of this study
consisted of individuals employed in the following government departments: basic education,
home affairs, labor, social development, the South African Police Service, correctional
services, health, South African Revenue Services, as well as telecommunications and postal
services. The questionnaire focused on three major aspects of financial literacy: retirement
planning, financial knowledge, and financial numeracy. Multiple regression analysis was
used to test the relationship between financial literacy and retirement planning. The results
indicated that there is a relationship between financial literacy and retirement planning.
Nyasha et al. (2022) examined the influence of financial literacy on retirement planning in
South Africa. Used secondary data from the 2011 South African Social Attitudes Survey
(SASAS). Demographic factors were used: gender, age, race, education, and income level.
Binomial logistic regression was used to establish if financial literacy influences planning for
retirement. The results show that financial literacy significantly influences retirement
planning.

Dovie (2018) explored the influence of financial literacy on retirement preparation among
retirement planners in Ghana. The study used questionnaire and interview data collected in
2018; a sample of 131 was taken. A mixed methods study was designed to investigate
pension scheme financial literacy and its influence on the entire process of retirement
preparation among workers using a questionnaire survey and key informant interviews.
Demographic factors included for analysis are age, marital status, educational background,
and occupation. The study population comprised individuals aged 15 and above, males and
females, who live in Adabraka. Fifteen-year-olds were included in the study because the
Pension Act 766 articulates 15 years as the earliest starting point for the pension
contribution. Basic descriptive statistics, including frequencies and percentages, were
computed. The results indicate a discrepancy regarding eligibility to contribute to and benefit
from pension schemes and/or systems.

Lusardi and Mitchell (2011) investigated financial education and retirement planning in the
United States. The Financial Industry Regulatory Authority (FINRA) Investor Education
Foundation conducted the National Financial Capability Survey in 2009 to benchmark key
indicators of financial capability and link these indicators to demographic, behavioral,
attitudinal, and financial literacy characteristics. A total of 1,500 American adults were
contacted by phone; the primary sample of 1,200 respondents was designed to be
representative of the general adult population in the United States. Because financial
capability is multifaceted, several indicators were gathered. Respondents were asked three
questions covering fundamental concepts of economics and finance expressed as they
would be in everyday transactions, such as simple calculations about interest rates and
inflation and the workings of banks, to assess Americans' financial knowledge. According to
the findings, many respondents lack key financial concepts and fail to plan for retirement,
even though retirement is only 5–10 years away. This is significant because the ability to
develop and implement a retirement plan is critical to retirement security. Those who do not
plan will have half the wealth in retirement as those who do. It is also concerning that the
lowest-paid and least-educated segments of the population know less, as these groups are
more likely to make poor financial decisions. Another effect of financial illiteracy is that it can
put a strain on families and personal finances, leading to poor investment, retirement, and
spending decisions.

Bucher-Kuenen and Lusardi (2011) examined financial literacy and retirement planning in
Germany. They examine financial literacy in Germany using data from the SAVE survey.
They used the 2009 cross-section, collected during the early summer, for the analysis in this
paper. To investigate the nexus of causality between financial literacy and retirement
planning, they developed an instrumental variable strategy by making use of regional
variation in the financial knowledge of peers. Three questions were asked to understand
financial literacy: 1. Understanding financial literacy; 2. Understanding inflation; 3.
Understanding risk diversification. An ordinary least-squares test was used. The results
showed the positive impact of financial knowledge on retirement planning.

Bucher-Kuenen and Lusardi (2011) investigated financial literacy and financial planning in
Japan. They used an SLPS panel survey that has been conducted annually since 2003. It is
a nationally representative sample of males and females aged 20–69 selected by a two-
stage stratified random sampling from household registers. This paper employs data from
the January–February 2010 wave (the eighth wave of the survey) because it is the first to
include the questions designed to measure respondents’ level of financial literacy. There
were 5,386 respondents in SLPS 2010, and the response rate was 88%. They conducted a
multivariate analysis to examine the relationship between retirement planning, financial
literacy, and socioeconomic characteristics. Firstly, he estimated a simple linear probability
model for regression. He uses planners as the dependent variable, which is a dummy
variable equal to one if respondents state they have a savings plan for their retirement.
Financial literacy is measured in three ways. The first measure is a dummy variable that
equals one if respondents were able to answer all three financial literacy questions correctly.
The second measure is the number of correct answers to the financial literacy questions.
The third measure is a set of three dummy variables indicating the correct answers to the
interest question, the inflation question, and the risk question, respectively. In addition, I
control for having had children's banks in school, age, gender, education level, household
income, marital status, number of children in the household, self-employment, non-
employment, occurrence of income shock, homeownership, and seven regional dummies.
The results showed that women, the young, and those with lower incomes and lower
educational attainment have the lowest levels of financial literacy, and financial literacy
increases the probability of having a retirement savings plan.
Agnew et al. (2012) examined the relationship between financial literacy and retirement
planning in Australia. The survey used the Pureprofile Web Panel and was fielded in June
2012 via the Internet. The Pureprofile online panel includes over 600,000 Australians. The
final sample of 1,024 individuals was designed to be representative of the general adult
population of Australia. Survey respondents were required to be over 18. Using an indicator
variable for retirement planning as the dependent variable, they estimated an ordinary least
squares (OLS) model. The dependent variable equals one if respondents answered
affirmatively to our retirement planning question and zero otherwise. Consistent with prior
literature, they include numerous control variables, including indicator variables for
homeownership, self-employment, and unemployment. They also account for each
respondent’s household income. They included age and age squared to allow flexibility in
the relationship between age and retirement planning. Overall, they found that aggregate
levels of financial literacy were similar in comparable countries, with the young, least
educated, unemployed, and those not in the labor force most at risk. However, unlike the
international norm, they found that financial skills increase with age.

Geng et al. (2020) examine the level of financial literacy and its impact on retirement
preparation in China. They used a source of data from the China Family Panel Studies
(CFPS), which were conducted by the Institute of Social Science Survey (ISSS) at Peking
University in collaboration with the Survey Research Center at the University of Michigan.
They restricted their sample to the 2014 survey, which covered 13,946 households across
29 provinces in China. The questions asked explored the awareness of the current interest
rate level, numerical skills, and understanding of inflation, interest compounding, and the
time value of money. They ran a multivariate regression model to explore the relationship
between retirement preparation and financial literacy. The empirical results show that
financial literacy strongly and positively impacts various aspects of retirement preparation
among Chinese people, including determining retirement financial needs, making long-term
financial plans, and purchasing private pension insurance.

Rob et al. (2011) investigated financial literacy, retirement preparation, and pension
expectations in the Netherlands. Two surveys were conducted to investigate the extent of
financial literacy and planning for retirement. The surveys were conducted in 2010, and they
selected members of the Center Panel aged 25 years and older, including both the
household head and partner, if present. A total of 1,665 respondents have completed the
questionnaire, with a response rate of 65.4 percent. They performed a multivariate analysis
of the relationship between retirement planning and financial literacy. Two different
measures of financial literacy were used: (1) a dummy variable that equals one if a
respondent correctly answered all three financial literacy questions, and (2) a variable
counting the number of correct answers to these three questions. They included dummy
variables that control for age, education, gender, marital status, net monthly household
income quartiles, home ownership, and religion to consider individual heterogeneity that
might affect the relationship between retirement planning and financial literacy. Also, a
simple ordinary least squares (OLS) regression of retirement planning on socioeconomic
controls and financial literacy In this analysis, they only consider the 2010 sample. Moreover,
they selected all respondents who are 65 or younger and not yet retired. The OLS results
also indicate that respondents do not tend to think much about retirement when they are
young, and retirement is a distant concept. After controlling for literacy, there is no role for
education in explaining retirement planning once we control for other individual
characteristics The empirical results convincingly show a causal relationship between
financial knowledge and thinking about retirement.

Meir et al. (2016) investigated the relationship between financial literacy and retirement
planning in Israel. Unique data was compiled from a survey developed by the Israel
Gerontological Data Center at the Hebrew University of Jerusalem to collect insights into
decision-making regarding investments in long-term savings schemes. The survey was
conducted in 2016 and distributed by email to a random sample of 501 Israelis drawn from a
database of persons registered on the iPanel online survey site. The sample group
comprised Jewish men and women between the ages of 46 and 613 who were either natives
of Israel or who immigrated to Israel before 1990 and were randomly distributed in terms of
place of residence, age, and gender. The survey composed for the research represents five
content indicators associated with financial literacy: searching for financial information,
monitoring accounts and household bills, economic knowledge, numeracy skills, and
retirement savings literacy. Several regression tests were run to determine factors affecting
financial literacy in general and retirement literacy by testing demographic and behavioral
variables against the impact of the various indicators discussed above. The findings show
that the activities of searching for financial information and monitoring household expenses
are positively correlated with retirement literacy, even after controlling for various
demographic and behavioral variables. Surprisingly, no significant correlation was found
between retirement literacy and financial knowledge or numeracy skills when controlling for
other variables. Financial literacy regarding retirement savings increases with an individual’s
tendency to meticulously check bills and periodic account statements, while financial
expertise does not necessarily translate into higher levels of retirement literacy.
Githuli and Ngare (2014) established the impact of financial literacy and retirement planning
in the informal sector in Kenya. A survey was conducted in 2014, and a total of 250
questionnaires were presented; however, some of the respondents (18) failed to adequately
answer the questions, and the questionnaires were discarded. A total of 232 questionnaires
were fully completed and used for the analysis. Descriptive statistics obtained from SPSS
version 17 on the variables respondents responded to were used. The demographic factors
analyzed included age, gender, marital status, number of children, occupation, income level,
and education level. Statistics showing the type of retirement arrangement to which the
"planners" belong are also given, as are the reasons advanced by the "nonplanners" for
failing to plan for retirement. The results indicate that other factors such as income levels,
age, marital status, and level of education are also strongly related to retirement planning.
Gender was found to have no impact on retirement planning. The study established that the
probability of a financially illiterate person having no retirement planning is significantly high,
calling for increased investment in financial literacy programs to reverse the trend.

Andrade et al. (2014) examined the relationship between financial literacy and effective
retirement planning using the National Financial Capability Study. Their focus was to
demonstrate the differences between females and males as well as between Caucasians,
African Americans, and Hispanics. The data used for this study was collected from the
Financial Industry Regulatory Authority (FINRA). The study was based on a national survey
given to 1,488 respondents, and their study consisted of two broad hypotheses to analyze
financial literacy and retirement planning: financial know-how and retirement preparedness.
The online study covered a four-month time frame: June 2009 to October 2009. A chi-
squared statistical analysis was used to compare the difference between an actual sample
and another hypothetical distribution. The results show that there are differences between
genders and races in financial literacy and retirement planning.

Maarten et al. (2012) investigated the relationship between financial literacy, retirement
planning, and household wealth in the Netherlands. They devised a special module for the
annual De Nederlandsche Bank (DNB) Household Survey (DHS), which includes a set of
questions on financial knowledge as well as a section on retirement planning activities. The
questions have been answered by the household panel run by Centre Data, a survey agency
at Tilburg University specializing in Internet surveys. They were filed from September 23
through September 27, 2005, and repeated a week later for those households that had not
yet responded. The response rate was 74.4% (1,508 out of 2,028 households). The DHS
contains a lot of information on income and work, health, household debt, and assets, as
well as an extensive set of psychological questions on attitudes concerning saving and
portfolio investments. We merge our module on financial literacy with the 2005 data from the
questionnaire on net worth. To investigate the relationship between household wealth and
financial literacy, basic multivariate regression and descriptive statistics were employed. The
results indicate that financial knowledge increases the likelihood of investing in the stock
market, allowing individuals to benefit from the equity premium. Secondly, financial literacy is
positively related to retirement planning, and the development of a savings plan has been
shown to boost wealth.

Another study investigated the relationship between financial literacy and the design of
retirement planning (Dvorak and Hanley, 2010). The data came from a survey administered
to employees of Union College, with 963 invitations to complete the survey. 707 invitations
were sent via email to employees with email accounts and 256 via campus mail to
employees without email accounts. The email invitations were linked to an online version of
the survey, which participants could complete online. The campus mail invitations were hard
copies, and participants had to complete the survey by hand and return it via campus mail in
an enclosed envelope. They received 247 responses from employees with email accounts
(35% participation) and 33 responses from employees without email accounts (13%
participation). The cumulative participation rate was 29%, with 280 completed surveys out of
the 963 invitations sent out. They used descriptive statistics for variables collected from a
survey of employees at a small liberal arts college. Income is self-reported annual income in
thousands. Some college, college graduate, and graduate degrees are dummy variables
indicating the self-reported level of education. The variable "contribute" is one if a
respondent makes personal contributions to her retirement plan. The variable "makes
changes" is true if a respondent makes changes to the asset of contribution allocation at
least once every 5 years. Also, they estimate three sets of regressions using three different
scores on the financial literacy test as the dependent variables. The first score is the score
on all questions; the second is the score on questions about mechanics; and the third is the
score on questions about differentiating among investment options. As independent
variables, they include demographic information and information about the degree of
participation in the plan. They found out that participants showed good knowledge of the
basic mechanics of the plan but were unable to differentiate among various investment
options. Knowledge is particularly low among women, low-income, and low-education
employees. They also found some evidence that personal contributions lead to more
knowledge. These results support plan designs with few investment options and encourage
personal contributions.
In the absence of a consistent definition in the literature, scholars and experts have
disagreed on the definition of financial literacy (Lusardi and Mitchell, 2011). However, the
above studies use the three questions developed by the American Health and Retirement
Survey in 2004 to measure financial literacy. The questions measure financial literacy using
three concepts: compound interest, inflation, and risk diversification. The questions have
been used by different scholars to measure financial literacy, such as Lusardi and Mitchell
(2011), Antoni et al. (2020), Andrade et al. (2014), Bucher-Kuenen and Lusardi (2011), and
Dovie (2018). Because of the questions' popularity, one might conclude that they are the
standard measure of financial literacy. The HSRC survey from 2011 will be used for the
purposes of this study. Basic arithmetic, simple and compounding interest, inflation, and risk
diversification were all covered in the survey. Because the concepts tested in this survey are
like those tested in the 2004 American Health and Retirement Survey, this study can be
compared to other financial literacy and retirement planning studies (Lusardi and Mitchell,
2011; Antoni et al., 2020; Andrade et al., 2014; Bucher-Kuenen and Lusardi, 2011; Dovie,
2018; Dvorak and Hanley, 2010).

These previous studies used different questions to assess retirement planning, but one thing
they all had in common was informing people about the importance of retirement savings.
Because the studies mentioned above used similar variables, they can be compared. The
preceding studies do not contradict one another because they all show a positive
relationship between financial literacy and retirement planning. However, the studies were
carried out on nations that are categorized as developed nations. There has been little
research conducted on developing countries such as South Africa. This study aims to
expand this research into the South African context.

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