Equilibrium.

Quarterly Journal of Economics and Economic Policy

Volume 14 Issue 4 December 2019
p-ISSN 1689-765X, e-ISSN 2353-3293
www.economic-policy.pl
ORIGINAL ARTICLE

Citation: Nguyen, T. A. N., Polách, J., & Vozňáková, I. (2019). The role of financial literacy in
retirement investment choice. Equilibrium. Quarterly Journal of Economics and Economic Poli-
cy, 14(4), 569–589. doi: 10.24136/eq.2019.027

Contact to corresponding author: [email protected]; Faculty of Finance and Banking, Ho Chi

Minh City Open University, 35-37 Ho Hao Hon St., District 1, Ho Chi Minh City, Vietnam

Received: 23.07.2019; Revised: 14.09.2019; Accepted: 11.11.2019; Published online: 28.12.2019

Thi Anh Nhu Nguyen

Ho Chi Minh City Open University, Vietnam
orcid.org/0000-0003-3619-4655

Jiří Polách
College of Entrepreneurship and Law, Czech Republic
orcid.org/0000-0002-2224-0414

Iveta Vozňáková
College of Entrepreneurship and Law, Czech Republic
orcid.org/0000-0003-0852-9809

The role of financial literacy in retirement investment choice

JEL Classification: D14; G11; G24; J26

Keywords: financial literacy; retirement; investment choice; financial advice; pension

knowledge

Abstract
Research background: Preparation for retirement is a major concern for the people in the work-
force as they have to encounter considerable difficulties in making the right investment decisions
for their retirement.
Purpose of the article: This research extends the literature on personal finance by investigating
the impact of both financial literacy levels and pension knowledge on employees’ investment
choice decision for their retirement, while in previous literature the role of these factors has main-
ly been explored separately.
Methods: To conduct the research, a survey questionnaire was applied to collect data in three
main regions of Vietnam comprising Northern, Central and Southern Vietnam. Data collection
was made in 2018, in which 427 valid questionnaires were used for data analysis from 700 ques-
tionnaires. Two estimation methods are employed for analysis in this study, including a linear
probability model (LPM) and two-stage least squares (2SLS) model. The findings of this research
remain significant after the Two-Stage Least Squares (2SLS) regression model is used as an
estimation technique to eliminate potential bias caused by endogenous problems.
Finding & Value added: The results show that basic financial literacy level and pension
knowledge are principal factors which significantly increase the probability of exercising retire-
ment investment choice of employees, while advanced financial literacy level factor has a signifi-
 Equilibrium. Quarterly Journal of Economics and Economic Policy, 14(4), 569–589

cant effect on choosing growth investing options for their retirement. Further, this research finds
that there is no correlation between employees’ financial risk tolerance and their retirement in-
vestment choice. Furthermore, the study proposes and offers new evidence that pension
knowledge is a decisive factor providing employees with encouragement to exercise retirement
investment choice and those who consult with financial advisors tend to take part in growth in-
vesting option.

Introduction

Over two decades, the 1990s and 2000s, many countries made public pen-
sion benefits more actuarially equitable and more closely connected to
working histories. At the same time, when the pension reform process shifts
defined-benefit (DB) to defined-contribution (DC) plan, it requires individ-
uals to take more responsibility for their financial well-being. Specifically,
in these extensive changes, individuals have to take financial decisions such
as savings, investment, and wealth accumulation by themselves. Indeed, the
reforms have brought some advantages to both the government and indi-
viduals. The government may reduce the burden of funding social benefits,
while individuals have more obligations to make plans and decisions for
their retirement, depending on their specific circumstances. However, the
reforms have also led to less liberal future pensions and caused more diffi-
culties for individuals to understand. Therefore, in order to prepare for their
retirement, working people have to encounter increasing difficulties in
choosing the most efficient ways to make the right decisions and consider-
ing the most suitable decisions for their specific situation.
Considering financial literacy is an underlying determinant of making
investment decisions and accumulating wealth (Lusardi et al., 2013), higher
level of financial literacy makes a major contribution to financial well-
being (Lusardi & Mitchell, 2011a; Lusardi & Tufano, 2015; Ključnikov,
2016). Nonetheless, most research has focused on the relationship between
this factor and savings, as well as retirement intentions. In addition, prior
research also concentrated on the correlation between financial literacy and
other factors such as participation in stock market (van Rooij et al., 2011),
participation in derivative market (Hsiao & Tsai, 2018), retirement plan-
ning (Boisclair et al., 2015; Nguyen & Rozsa, 2019), individual savings
(Mahdzan & Tabiani, 2013; Pan, 2016; Belás & Ključnikov, 2016). Other
research studied the association between financial literacy and other deter-
mining factors of financial behaviour and household savings (Belás et al.
2014; Agarwal et al. 2015; Belás & Gabčová 2016; Pan, 2016). Very little
research explored and identified the determinants of retirement investment
choice decision-making or the effects of financial literacy on this decision-

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making process. Accordingly, there should be far more research on this

correlation.
Vietnam is a typical case to explore the effects of financial literacy on
retirement investment choice decisions owing to its economic and social
conditions. Firstly, Vietnam is a transition and fast-growing economy with
an expanding financial market. Established in the early 2000s, the capitali-
zation of the stock market grew rapidly and reached 40.4% of GDP in
2017. Regarding the capital market, government bonds contributed 31% to
GDP in 2016 (World Bank, 2018). The banking industry consists of a va-
riety of financial institutions, including state commercial banks, interna-
tional banks and private banks. Consequently, major cities including Ho
Chi Minh and Ha Noi provide valuable and professional consumer finance
services thanks to the presence of many bank branches, financial companies
and other financial institutions such as mutual funds and securities compa-
nies. Also, people who would like to invest for their retirement can have
a large number of options of financial products and financial instruments
namely long-term deposits, stock markets, private pension funds and mutu-
al funds, government bonds and corporate bonds, and investment trusts.
However, at the same time, in order to confidently break into this fast-
growing market, people need to acquire a certain level of financial
knowledge to reach wise decisions on progressively complicated products
and the capacity for assessing the performance of these products. Further,
according to the World Bank (2012), social security system of developing
countries, especially the one of Vietnam, is ineffective due to low coverage
rate, inequitable contributions and benefits, and financial instability. Con-
sidering that people in these countries cannot afford basic needs in their
retirement, because of low pension income and marginal benefits, it is es-
sential for working people to invest for their retirement by taking invest-
ment choice decisions.
Accordingly, in this context the first question is posed to ask if Viet-
namese people currently in the workforce have prepared for their retirement
by making retirement investment choice or not. In addition, the question of
how the levels of financial literacy influence people to make retirement
investment choice is also considered. Furthermore, in the context of the
pension system in Vietnam, whether employees have enough pension
knowledge to recognize and perceive the pension income that they receive
in retirement stage. Consequently, the main objective of the present work is
to make contributions to the growing body of literature on encouraging
people currently in the workforce to take investment choice decisions in
preparation for their retirement by making three major contributions. First,
in this research a conceptual framework is established to make decisions on

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retirement investment choice in order to recognize its determinants. Se-

cond, unlike previous research, which only dominated the effects of finan-
cial literacy on investment decisions, this research explores the role of pen-
sion knowledge, which is considered a key factor in decisions on retirement
investment choice. Finally, to motivate individuals to invest for their re-
tirement, in this research pension knowledge and financial literacy are de-
fined as determining factors of decisions on retirement investment choice.
This paper is organized as follows: After an introduction, a brief litera-
ture review and hypothesis development are presented. Then, the following
section develops a conceptual framework and describes the research meth-
odology in detail with data collection method, measurement of variables
and the estimation technique, which employs the Two-Stage Least Squares
(2SLS) regression model. Finally, the results and discussion section and
conclusion are presented in the last section of this paper.

Literature review and hypothesis development

Financial literacy and financial decision-marking

It is proved that financial knowledge has a close relationship with financial

decision-making. Particularly, individuals with a higher level of financial
knowledge are more likely to participate in stock market (van Rooij et al.,
2011; Yoong, 2011), save more for their retirement and have varied portfo-
lios and considerable wealth accumulation (Lusardi et al., 2013). Regarding
bounded rationality and bounded self-control theories (Thaler & Shefrin,
1981) in behavioural economics, these researchers suggest and explain
some reasons why individuals do not involve in making decisions about the
savings for their retirement. Firstly, they usually apply their heuristics or
‘rules of thumb’ to address information and then make decisions, so this
leads to constraints on rational choice. Secondly, individuals often do not
take the initiative and are not self-motivated to execute their purposes even
if they have planned for that. For example, when individuals face
a complex and choice overload of retirement investment decisions, they
have a propensity to procrastinate or walk away from exercising investment
choice decisions (Fear, 2008; Sy, 2011). Likewise, it is indicated that if the
perceived benefits of making investment choice are more significant than
the costs individuals pay for collecting adequate information to exercise
informed choice, they will tend to choose the former option (Brown et al.,
2002). Accordingly, more financially literate individuals have a propensity

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to make pension choice decisions as they spend less on the information

than those with lower financial literacy.
In fact, it has been proved in previous research that there is a relation-
ship between financial literacy and a variety of financial behaviours. As an
illustration of this, when conducting research on joining in the stock market
in the Netherlands, van Rooij et al. (2011) indicate that individuals who do
not have a good understanding of equities and bonds, and how financial
markets work are less likely to invest in share market. Furthermore, in an-
other research on retirement savings, van Rooij and Teppa (2008) also
prove that more financially literate individuals are more likely to take part
in optional pension savings programs. Likewise, Dvorak and Hanley (2010)
and Clark et al. (2015) find in their research in the US that the more finan-
cially literate individuals are, the stronger possibility for them to join in
defined contribution plans.
Briefly, it can be assumed that people with a greater understanding of
financial knowledge tend to exercise financial decisions. In particular, they
are more likely to join in the stock market (Clark et al., 2015; van Rooij et
al., 2011), choose optional pension savings programs (van Rooij & Teppa,
2008), or join in defined contribution plans (Dvorak & Hanley, 2010). As
a consequence, people with a higher level of financial literacy have a pro-
pensity to take pension savings decisions so that they tend to make an in-
vestment choice. Hence, the following hypotheses are posed:

Hypothesis 1A: There is a positive correlation between financial literacy

level and the propensity to make retirement investment choice.

Hypothesis 1B: There is a positive correlation between financial literacy

level and the propensity to choose growth investing options instead of con-
servative investing options.

Pension knowledge and retirement investment choice decisions

In a preponderance of research on investment decision-making, finan-

cial knowledge is considered a major indicator of this decision-making
process. In this research, nonetheless, a framework is proposed so that other
factors especially pension knowledge are also taken into consideration in
order to examine and indicate which ones are the drivers of working peo-
ple’s choice of retirement investment. Indeed, pension knowledge has been
investigated in a small number of studies only. In order to measure this
factor, many features such as contribution, defined contribution pension,
defined benefit pension, and benefit information are applied. To evaluate

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the level of individuals’ pension knowledge, individuals are asked to an-

swer a set of questions in relation to how defined-benefit pension system
work. This questionnaire is comprised of age, voluntary, eligibility condi-
tions, contribution formula and benefit formula (Luchak et al., 2000).
Gustman and Steinmeier (2005); Gustman et al., (2012) hypothesized
that with pension knowledge individuals can clearly understand why they
need to save for their retirement. This research supports this hypothesis
since when people comprehend and perceive the prospective benefits and
the policies of their social welfare system, they recognize what contribution
they should make and the rate they would receive when they retire. Hence
pension knowledge could drive people to invest or make savings for their
retirement. In other words, pension knowledge might have a significant
correlation with wealth accumulation and pension income in retirement
stage. Therefore, in the context of developing countries, particularly the
pension system in Vietnam with the undeveloped and uncompleted social
security benefits system, along with participation in social insurance work-
ing people also need to invest for their retirement. This is because when
they have knowledge of pension, they could realize that their pension in-
come in the future cannot afford to ensure their living standard when they
retire. Thus, it is possible to suggest that people are more likely to invest
for their retirement when they have a higher level of pension knowledge.
Therefore, it can be hypothesized that:

Hypothesis 2: There is a positive correlation between the level of pension

knowledge and the propensity to make retirement investment choice.

Other factors influencing retirement investment choice decisions financial

risk tolerance

It is believed that those working in pension fund and in charge of de-

fined contribution plans have profound economic knowledge, effective
rational action and potential capability to maximize its contributions. None-
theless, when people have to take risk, or when they have to face something
unpredictable, they do not always take up suggestions the economic theory
developed (Kahneman & Tversky, 1979). Further, according to Davey and
Resnik (2008), risk tolerance is defined as the amount of risk an investor is
willing to take to produce a positive financial outcome.
To understand the relationship between risks and investment products,
investors need to acquire a certain amount of knowledge and experience.
Therefore, knowledge plays a crucial role in financial decision-making,
especially long-term investment decisions. According to Benjamin et al.

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(2013) and Dohmen et al. (2010), there is a relationship between a lower

level of cognitive abilities and financial risk tolerance. In addition, it is
proved that people’s opinions and their awareness of financial risks are
closely related to financial decisions (van Rooij et al. 2011). Benjamin et
al. (2013) and Dohmen et al. (2010) also suggest that there may be a rela-
tionship between knowledge and cognitive ability and preferences, for
example, risk aversion, which could have an impact on financial choice
decisions. This means individuals with conservative characteristics prefer
fixed income investing for their investment portfolios, so it also affects
their investment choice. For instance, conservative investors usually select
savings account, certificates of deposit (CDs) or bonds for long-term in-
vestment. Conversely, individuals among a group of aggressive investors
typically observe the volatile market and deeply understand this market. As
a result, they prefer jointing in the stock market and selecting highly vola-
tile financial instruments as aggressive investors tend to maximize profits
and are also willing to take the maximum risk. Hence, financial risk toler-
ance could have a correlation with decisions on retirement investment
choice. Therefore, the following hypothesis is posed:

Hypothesis 3: There is a positive correlation between financial risk toler-

ance level and the propensity to make retirement investment choice.

Financial advice

Financial advice can support investors strongly in many different ways.

Financial advisors can provide investors with detailed information, help
them avoid elementary mistakes, provide explanations and propose solu-
tions to unexpected problems. According to Stigler (1961), individual in-
vestors are likely to refuse to consult with financial advisors when there is
no difference between the marginal cost and marginal benefit. This is be-
cause these investors believe that it is more beneficial to use financial con-
sultancies than to search information by themselves since they think the
former option is cheaper than the latter one.
Based on the literature, in order to make informed financial decisions,
a number of social factors are taken into account in this decision-making
process. Specifically, individual investors might seek information or ask for
advice from several channels before reaching any financial decisions. Ac-
cording to a model examining the impacts of social interactions on people’s
attitudes suggested by Glaeser and Scheinkman (2000), it is proposed that
there is a relationship between these interactions and individuals’ financial
decisions.

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Some research works consider the role of advisor in assisting individu-

als to make decisions. Haslem (2008) declares that financial advisors can
assist customers to control their feeling of lack of confidence or vulnerabil-
ity. In addition, this study also suggests the role of advice for individuals in
helping them revise their past decisions. Because of the deficiency of stud-
ies in this area, the literature does not indicate whether individuals seek
advice in order to compensate for the lack of financial literacy or look for
sophisticated financial knowledge to make informed decisions. However,
the result of the research of Hackethal et al. (2012) points out that advice
has a significant positive relationship with wealth accumulation.
Although the role of advice in the decision-making process is not clearly
mentioned, this research still supports the idea that advisors are necessary
for decisions which require advanced or sophisticated financial knowledge
to support individual investors in building confidence to make informed
choice decisions for their investment, particularly retirement investment.
To support this idea, Calcagno and Monticone (2015) propose a stylized
model of demand for financial advice. They comment on the fact that
advice experts often search for and provide valuable information to sophis-
ticated investors only. Accordingly, it is believed that seeking advice from
financial experts is one of the options to support individuals to be able to
make informed decisions, since this information and knowledge can in-
crease their confidence when making financial decisions. It is crucial in the
context of emerging markets in which financial instruments and products
are developed rapidly, but other facilities such as policies and asymmetric
information status are incomparable. Therefore, in this research, it is also
expected that those consulting with financial advisors or using financial
consultancies tend to make retirement investment choice actively. Hence,
the following hypothesis is posed:

Hypothesis 4: Employees who seek advice from financial experts are likely
to make retirement investment choice.

Conceptual framework development

Based on the literature review and informed choice model which was pro-
posed by Brown et al. (2002), this study develops and proposes a conceptu-
al framework which examines the disparities in how employees who have
and have not exercised choice make retirement investment decisions for
their retirement. Particularly, this conceptual framework includes essential
factors namely basic and advanced financial literacy, perceived financial

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 Equilibrium. Quarterly Journal of Economics and Economic Policy, 14(4), 569–589

literacy, pension knowledge. Other factors such as financial risk tolerance,

financial advice and demographics characteristics which are considered
control variables are also taken into account in order to investigate and
indicate factors encouraging employees to exercise retirement investment
choice (Figure 1).

Research methodology and data

Data collection method

Regarding data collection, objective respondents who are currently em-

ployees in private and public sector were collected based on the specific
characteristics of Vietnam’s economy and geographic region with a strati-
fied random technique. Particularly, Ha Noi capital, Ho Chi Minh City and
Da Nang city represent three main regions of Vietnam which are appropri-
ate for the purpose of the research. Data collection was conducted in a peri-
od of two months from January to March 2018. Two methods were applied,
including interviewing face to face and using the link online for those who
would rather choose this option. A summary of sample process was 427
valid questionnaires used for data analysis from 700 questionnaires, in
which 362 respondents participated in face-to-face interview using paper-
based questionnaires and the rest of participants did it online. Invalid ques-
tionnaires which were not completed or with the same answer “Do not
know” were removed from data analysis.

Measurement of variables

In this research, financial literacy was considered the main explanatory

variables besides other variables such as pension knowledge, financial risk
tolerance and financial advice variables. In addition, socio-demographic
characteristics such as gender, age, education level, marital status, income
level, family member and home ownership are also considered control vari-
ables. Dependent variables in this study are described as follows:
− Retirement investment choice: whether the respondents have exercised
retirement investment choice or not (1 if yes; 0 if no).
− Growth investment choice: whether the respondents who have exercised
retirement investment choice participate in growth investing option in-
cluding stocks, mutual fund and investment trust or conservative invest-
ing option including deposit account; savings account and private pen-

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 Equilibrium. Quarterly Journal of Economics and Economic Policy, 14(4), 569–589

sion funds (1 if participating in growth investing option; 0 if participat-

ing in conservative investing option).
Following Gallery et al. (2011); van Rooij et al. (2011), the research
questionnaire was constructed and developed with six components. The
first component financial literacy is measured by perceived financial litera-
cy, basic financial knowledge and advanced financial knowledge. The next
components are pension knowledge, financial risk tolerance, financial ad-
vice which were suggested by Luchak et al. (2000) and Gustman et al.
(2012); and van Rooij et al. (2007) respectively. The last component in the
research questionnaire includes socio-demographic characteristics.

Empirical model

Two estimation methods are employed including a linear probability

model (LPM) and two-stage least squares (2SLS) model for analysis in this
study. First, a linear probability model (LPM) is estimated because depend-
ent variables are binary variable. Second, two-stage least squares model
(2SLS) is applied to control endogeneity problem because of mistakes in
measurement or unobserved variables. Moreover, another possible reason
for endogeneity problem is reverse causality caused by investors who have
experience of taking part in financial market such as investing in stock
market or using sophisticated financial products. These investors might
gain knowledge from these situations. According to Lusardi and Tufano,
(2015); Fornero and Monticone (2011), this could lead to a negative effect
on the correlation between financial literacy and financial behaviour.
Therefore, the potential endogeneity of financial literacy is tested. Instru-
mental variables proposed by van Rooij et al. (2011) and Fornero and Mon-
ticone (2011) are applied in this research to address the endogeneity prob-
lem. These variables include parents’ education level, training courses in
economics and finance areas and respondents’ experience in historical in-
vestment or sophisticated financial products. The Two-Stage Least Squares
(2SLS) regression estimate is described as follows:

= ∝ + + + + ⋯+ + (1)

Where is defined as an endogenous variable, and it is estimated by

instrumental variables and all exogenous variables [instruments, z = (1,
x1,…,xk, z1,…, zm)]. The instrumental variables are correlated with , we
have:

= + + + …+ + + ⋯+ + (2)

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Results

Statistics of data collection

Table 1 provides detailed profile of the demographic factors of respondents.

The table shows that the percentage of male and female respondents is 52%
and 48%, respectively. Among the respondents, there are more than half of
interviewed individuals around 52% in the age group of 26–35 years, 26%
in the age group of 36–50 years old and the rest of respondents’ age group
are 16% and 6% for the age group of under 25 years and over 51 years,
respectively. Regarding the education level, the majority of respondents
have diploma or bachelor’s degree (65%), because the objective respond-
ents in this study are employees or office staff, post graduate degree (8%)
and high school degree (27%). Most of respondents in this study are single
(63%) and there is a half of respondents earning a monthly income of under
VND 9 million and they also have their own home.
The statistics for the key variables used in the empirical analysis are
presented in Table 2. It reports the descriptive statistics on analysis, includ-
ing information about the observation of the sample survey and a range of
points of measurement of critical variables for empirical analysis.

Regression analysis

Exercising retirement investment choice

Table 3 provides the estimation results of the factors which affect indi-
viduals’ retirement investment choice decision-making. Generally, the re-
sults are robust and obtained from two different estimation methods LPM
in column 1 and 2SLS in column 2.
The results of LPM estimation method in column 1 indicate that the cor-
relation between exercising retirement investment choice and the factors of
basic financial literacy, advanced financial literacy, and pension knowledge
is positive and statistically significant. This means that individuals who are
more financially literate in both basic and advanced financial literacy and
pension knowledge are more likely to exercise retirement investment
choice. As an illustration of this, when the score of these factors increases
by 1, it is estimated to raise the likelihood of making choice about invest-
ment for retirement by 17.3%, 11.5% and 6.1% points respectively. On the
contrary, other factors including perceived financial literacy; financial risk
tolerance and financial advice have no correlation with choice about in-
vestment for retirement.

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However, according to prior research of Lusardi and Mitchell (2007b);

van Rooij et al. (2011), the authors indicate that the potential endogenous
problem occurs when they examine the nexus of financial knowledge and
stock market participation by applying Ordinary Least Squares (OLS) re-
gression. Hence the results of the estimation based on LPM method in this
study have a potential endogeneity problem, and this leads to bias against
the results of investigating the relationship between financial literacy and
finance behaviour in saving and investing of individual investors. In addi-
tion, in this research, other reasons could also cause this endogenous issue,
such as investors’ experience in their investment; improvement in
knowledge by themselves or unobserved factors. Hence solely employing
LPM estimate could have bias towards the results of this research.
To defeat endogenous problem in order to avoid bias in results, Two-
Stage Least Squares (2SLS) estimation was applied in this research by inte-
grating instrument variables into the estimation model. The results in col-
umn 2 in Table 3 reveal that exercising retirement investment choice is
positively correlated and statistically significant with basic financial litera-
cy level and pension knowledge at P<0.01 and P<0.1 respectively. Mean-
while, perceived financial knowledge is found to have a negative and statis-
tically significant correlation with exercising retirement investment choice.
This can be interpreted that those who have acquired a higher level of basic
financial literacy have a propensity for making an investment choice for
retirement. This finding is confirmed and in a similar trend, in comparison
with prior studies conducted by Fornero and Monticone (2011) and Ricci
and Caratelli (2017). Similarly, those who have gained greater pension
knowledge have a propensity to exercise retirement investment choice. In
other words, in order to encourage increased participation in retirement
savings, it is necessary for employees to broaden their pension knowledge,
especially that in relation to the rates of contribution and benefit of the so-
cial insurance system and their understanding of financial investment op-
tions available on the market. This result produces new evidence in relating
to retirement investment choice and corroborates the finding that employ-
ees with greater pension knowledge are more likely to get better pension
(Gustman et al., 2012). Nevertheless, there is no statistical significance in
the association of exercising retirement investment choice with other fac-
tors, including sophisticated financial literacy level, financial risk tolerance
and financial advice.
Hence the results partially support hypothesis 1A. This indicates that
there is a positive correlation between basic financial literacy level and the
propensity to make retirement investment choice. Similarly, hypothesis 2 is
also substantiated. In other words, a positive correlation is found between

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pension knowledge and the propensity to make retirement investment

choice. In contrast, the results of this research do not support a part of hy-
pothesis 1A, as well as hypotheses 3 and 4. This means factors including
advanced financial literacy, financial risk tolerance and financial advice do
not have impact on exercising retirement investment choice of Vietnamese
employees.
Moreover, in the Two-Stage Least Squares (2SLS) model, the potential
endogeneity of financial literacy is tested along with other instrument vari-
ables applied in this model. This research has employed Wu-Hausman test
and F-statistics to check the endogenous problem of financial literacy and
remove the weak problem of instrument variables, respectively. Conse-
quently, the results confirm that with P-value < 0.05 endogenous variables
are considered financial literacy variables. Likewise, with F-statistics in the
first stage regression of 2SLS of 22.8 and 45.0 for basic financial literacy
and advanced financial literacy respectively, the results confirm that in-
strument variables are not weak.

Investment choice outcome

To identify the role of advanced financial literacy level in investment

choice outcome through investing growth options or investing conservative
options, hypothesis 1B is tested and the results is presented in Table 4.
Table 4 provides the estimation results of investment choice outcome of
those who have participated in investment for their retirement. Two estima-
tion methods are performed concurrently, including LPM and 2SLS. How-
ever, the results from 2SLS model in column 2 are far more statistically
significant than those from LPM model in column 1.
The results in LPM model estimation indicate that participants who have
a higher level of advanced financial literacy and consult with financial ad-
visers are more likely to participate in growth investing option. Particularly,
the possibility of investing in growth options is anticipated to increase by
17.6 and 20.8 per cent points when there is a rise of 1 score in advanced
financial literacy or when participants consult with financial advisers re-
spectively. This indicates that employees who have gained sophisticated
financial knowledge or have used consultancy from advisers may increase
demands for participation in growth investing. Meanwhile, other factors
comprised of perceived financial literacy, basic financial literacy and finan-
cial risk tolerance have no association with investment choice outcome.
Similar to the results from column 1, after applying Two-Stage Least
Squares (2SLS) to control the endogenous problem, column 2 shows the
same results. Regarding marital status, nonetheless, married participants

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 Equilibrium. Quarterly Journal of Economics and Economic Policy, 14(4), 569–589

have a tendency to choose a conservative investing option. Hence hypothe-

sis 1B is supported, which proposes that the higher level of advanced finan-
cial literacy employees have, the more likely they take part in growth in-
vesting option.
These results in table 4 also check the endogeneity of financial literacy.
Once again researchers apply Wu-Hausman test and F-statistics. This re-
search also checks appropriate instrument variables by applying 2SLS
model under control of the endogeneity of financial literacy. By rejecting
the null hypothesis (P-value < 0.05) and with F-statistics 15.9 for advanced
financial literacy in the first stage regression of 2SLS, the results confirm
that financial literacy is endogenous variable.

Discussion

Two-Stage Least Squares (2SLS) regression produces the results that basic
financial literacy and pension knowledge are positively correlated with
retirement investment choice decision-making. These results are consistent
with previous works (Clark et al., 2015; Lusardi et al., 2013; Gustman &
Steinmeier, 2005; Gustman et al., 2012; van Rooij & Teppa, 2008). Hence
the result suggests that people with more basic financial literacy and pen-
sion knowledge have a propensity to take retirement investment choice
decisions. In contrast, regarding financial risk tolerance and financial ad-
vice, the result reveals that retirement investment choice decision-making is
not correlated with these factors. This result is not in line with previous
studies (van Rooij et al., 2011; Calcagno & Monticone, 2015). Particulary,
van Rooij et al., (2011) indicated that there is a correlation between finan-
cial risk tolerance and financial behaviour. In terms of financial advice,
Calcagno and Monticone, (2015) supported and suggested the role of finan-
cial advice in providing information for making decisions.
With regard to people who have taken retirement investment choice de-
cisions, it is proved that growth investing participation is solely chosen by
people who have achieved advanced financial literacy and have sought
advice from financial experts. Contrary to the propensity to make retire-
ment investment choice, the result shows that investment choice outcome is
not correlated with basic financial literacy. It means that only employees
who have acquired sophisticated financial literacy are likely to choose
a different option. The finding is in line with and confirms the research
carried out by van Rooij et al. (2011) and Clark et al. (2015), who indicated
that people with advanced financial knowledge are more likely to partici-
pate in growth investing option such as stock market. Recently, the findings

582
 Equilibrium. Quarterly Journal of Economics and Economic Policy, 14(4), 569–589

from study made by Feng et al. (2019) also indicated the nexus between
financial literacy and financial household. Furthermore, the present re-
search interestingly provides new evidence related to the role of advisers in
financial decision on sophisticated financial products.
Generally, part of hypotheses 1A, 1B and hypothesis 2 are supported by
the findings from the 2SLS estimation model whereas hypotheses 3 and 4
are not supported. Accordingly, it is proposed that basic financial literacy
and pension knowledge have some impacts on decisions on retirement in-
vestment choice whereas advanced financial literacy and financial advice
from experts affect employee’s selection of or participation in growth in-
vesting.

Conclusions

Establishing a conceptual framework is the prime objective of this research

in order to examine and define what part financial literacy, pension
knowledge and other major factors play in encouragement to those in the
workforce to prepare for their financial well-being in retirement by taking
retirement investment choice decisions. The findings indicate that both
basic financial literacy and pension knowledge have dramatic impacts on
decisions on retirement investment choice. Further, sophisticated financial
literacy also motivates people to exercise choice of the outcome of retire-
ment investment. Hence the dominant role of financial literacy, pension
knowledge and financial advice in motivating people to take decisions on
retirement investment choice is defined. Consequently, the results of this
research could be precious to the government and financial institutions so
that these organisations can be fully aware of people’s demand for pension
savings and satisfy their needs. These organizations may design and pro-
vide financial literacy programs with long-term prospect for development
of these programs. This is because in order to ensure financial well-being of
individuals in retirement, it is essential for these individuals to recognize
that there is a gap in their financial knowledge so that they are not capable
of solving complicated financial problems. It is also important to build
confidence in their basic financial literacy in order to take retirement in-
vestment choice decisions.
Also, the findings could be valuable to financial advisors as this re-
search indicates that individuals who seek advice from financial advisors
have a tendency to select growth investing option. The findings also pro-
pose that financial institutions should launch sustained educational cam-

583
 Equilibrium. Quarterly Journal of Economics and Economic Policy, 14(4), 569–589

paigns and use practical approaches to assist those seeking advice on fi-
nance.
Regarding further examination on this area, future research can be ex-
panded by exploring the dynamics of individual investors’ participation in
stock market and the role of financial education capital factor.

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Acknowledgement

The authors are thankful to Ho Chi Minh City Open University for funding this
research. We would like to thank the anonymous referees for their helpful com-
ments and suggestions.

586
Annex

Table 1. The respondents’ demographic and socioeconomic details

Variables Categories Frequency %

Gender Male 222 52%
Female 205 48%
Age group <= 25 years 68 16%
26 to 35 years 222 52%
36 to 50 years 110 26%
51 to 60 years 27 6%
Education High school 115 27%
Diploma/bachelor’s degree 278 65%
Post-graduate’s degree 34 8%
Marital status Married 154 37%
Single 273 63%
Children No children 201 47%
1 child 103 24%
2 children 110 26%
>2 children 13 3%
Income level <= VND9 million 213 50%
>VND9 to 15 million 115 27%
>15 million 99 23%
Home owner Yes 226 53%
Not yet 201 47%

Table 2. Descriptions and statistics of key variables

Mean (S.D) Observation Min Max

Retirement investment choice (1 = yes) 0.510 (0.500) 427 0 1
Perceived financial literacy 2.634 (.996) 427 1 5
Basic financial literacy score 2.428 (1.113) 427 0 4
Advanced financial literacy score 4.018 (2.193) 427 0 8
Pension knowledge score 3.039 (1.421) 427 0 6
Financial risk tolerance 11.62 (2.421) 427 5 20
Table 3. Exercising retirement investment choice

LPM (1) 2SLS (2)

Basic financial literacy .173***(.017) .525***(.089)
Advanced financial literacy .115***(.007) .036 (.038)
Perceived financial literacy -.001 (.011) -.039** (.019)
Pension knowledge .061***(.012) .039* (.021)
Financial risk tolerance -.0001 (.004) -.017 (.035)
Financial advice (base group: no advice)
- Friends & colleagues .0002(.023) -.004 (.042)
- Adviser .018 (.042) -.005 (.059)
Gender (base: female)
- Male .008 (.022) .024 (.042)
Age (base group: age <=25)
- 25 < age <= 35 -.007 (.034) .018 (.054)
- 36 < age <= 50 -.020 (.041) .026 (.068)
- 50 < age <= 60 -.080 (.056) -.148 (.090)
Education level (base group: high school)
- Diploma/bachelor’s degree -.017 (.026) .070 (.052)
- Post graduate degree -.008 (.046) .089 (.104)
Married .001 (.033) -.052 (.053)
Number of children .018 (.017) .031 (.029)
Income (base group: under VND9 million)
- VND>9-15 million -.048* (.028) -.038 (.045)
- Over VND15 million .018 (.027) -.055 (.051)
Home owner .012 (.028) .043 (.052)
Observations 427 427
R2 0.82 0.51
Durbin (score) chi2 (2) 106.27 (p=0.00)
Wu-Hausman F (2,406) 67.261 (p=0.00)
First-stage regression (F- test):
- Basic financial literacy 22.8
- Advanced financial literacy 45.0
Robust Standard errors in parentheses; ***P<0.01, **P<0.05, *P<0.1
Table 4. Investment choice outcome (N=218)

LPM 2SLS
Basic financial literacy .007 (.044) .028 (.173)
Advanced financial literacy .176***(.029) .302***(.047)
Perceived financial literacy .004 (.031) .019 (.035)
Financial risk tolerance -.029 (.060) -.005 (.012)
Financial advice (base group: no advice)
- Friends & colleagues .063 (.061) .090 (.061)
- Adviser .208** (.102) .225**(.110)
Gender (base: female)
- Male .025 (.055) -.073 (.065)
Age (base group: age <=25)
- 25 < age <= 35
- 36 < age <= 50 -.046 (.090) -.047 (.090)
- 50 < age <= 60 .024 (.113) .055 (.109)
Education level (base group: high school) -.140 (.145) -.074 (.148)
- Diploma/bachelor’s degree
- Post graduate degree -.012 (.060) -.074 (.093)
Married .026 (.115) -.103 (.141)
Number of children -.141 (.086) -.167* (.097)
Income (base group: under VND9 million) -.001 (.043) -.028 (.048)
- VND>9-15 million
- Over VND15 million .046 (.070) .042 (.074)
Home owner -033 (.068) .015 (.077)
Observations
R-squared .047 (.075) .133 (.077)
218 218
0.28 0.19
Durbin (score) chi2 (2) 14.279 (p=0.00)
Wu-Hausman F (2,406) 6.939 (p=0.00)
First-stage regression (F- test):
- Basic financial literacy 12.21
- Advanced financial literacy 15.9
Standard errors in parentheses; ***P<0.01, **P<0.05, *P<0.1

Figure 1. Framework for retirement investment choice decisions

Financial Literacy
Basic FL

Advanced FL

Perceived FL H1A Growth

No
investing
CHOICE H1B option
Pension knowledge
Yes
H2, H3,
Conservative
Financial risk tolerance H4
investing
option
Financial advice