Planning for and managing retirement are inherently complex tasks. Persons with higher overall cognitive functioning may have higher financial literacy and be better equipped to handle such complexity. Since cognitive abilities change with age, often with pronounced declines in fluid or reasoning abilities, as older Americans enter retirement they may be losing the capability to make sound decisions to maximize their own welfare. We examine the relative roles of cognitive ability and financial literacy, and decline in cognitive ability, in influencing retirement-related financial behaviors, such as retirement saving and the decumulation of wealth. We find consistent evidence that when financial literacy and cognitive ability are both used to predict retirement planning behavior, financial literacy tends to have the largest influence on predicted behavior. Accordingly, our evidence supports a conceptualization in which financial literacy is a partial mediator of the relationship between underlying cognitive abilities and resulting behaviors. We also track fluid cognitive ability for individuals longitudinally over time and find that those with steeper cognitive decline are more likely to withdraw from pensions and more likely to claim Social Security at any given age. Together, our results suggest that cognition, and any decline in cognition, matter for retirement financial behaviors.
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