Why financial literacy is vital for a good retirement

With Australia’s multi-pillar retirement income system (which consists of a means-tested Age Pension, compulsory superannuation and your personal savings in and out of super), it can be tough to work out how much you need to save and even what your likely nest egg will be when you do retire.

Retirees in many other countries have it much easier with defined benefit pension systems, so they know where their money will come from – their former employer or the government – and exactly how much they will get. 

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In Australia, our defined contribution system makes retirement outcomes more uncertain, as retirement income from a superannuation account-based pension, and how long your savings last, will depend on the performance of investment markets.

Why your financial literacy skills matter

It’s well accepted that having at least a basic understanding of your finances and how financial products work has a profound impact on your overall financial position and your ability to provide for your future financial needs.

People with lower levels of financial literacy generally face worse financial outcomes, such as lower wealth accumulation and super balances. They often make poorer investment decisions and frequently have reduced confidence about their finances.

As the OECD International Survey of Adult Financial Literacy notes: “Adults with higher levels of financial literacy also display higher levels of financial wellbeing and financial resilience.”

Financial literacy skills are increasingly important as consumers are being asked to shoulder more of the burden when it comes to making everyday financial decisions. There are also higher levels of household indebtedness than in the past, plus easier access to credit from a variety of non-traditional sources.

How financially literate are Australians?

Australians have traditionally ranked relatively well globally when it comes to financial literacy levels. Concerningly, however, recent research has found there are significant gaps in our knowledge.

A 2024 Reserve Bank study found there was a strong link between reported inflation expectations and the assessed level of economic literacy. Those with low levels of financial literacy had very high expectations of inflation.

As financial literacy increased, inflation expectations reduced and were closer to the RBA’s actual 2–3% inflation target. Females also consistently overestimated inflation, relative to males across all scores of economic literacy.

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Vanguard’s 2025 report, How Australia Retires, also found low levels of financial literacy in certain areas, with many Australians struggling to understand basic financial concepts like interest, inflation and the importance of diversification in managing risk.

The report found most Australians are comfortable when it comes to basic financial products like savings accounts, but confidence drops when it comes to super, shares and investment products like exchange-traded funds.

And we’re not alone. Globally, the OECD survey found only 42% of adults understand compound interest and only 63% of adults can apply the concept of the time value of money to their own savings. This is concerning, as both concepts are fundamental to understanding the performance of super before and after retirement.

Retirement savings and financial literacy

There is also a significant relationship between your financial literacy level and your retirement savings, with recent international research confirming financial literacy has a positive impact on retirement planning.

Worryingly, the Vanguard 2025 report found almost one in two working Australians (48%) had no plan for how they would prepare for retirement.

There are also major knowledge gaps around simple facts like the preservation age, with just 40% of survey respondents able to correctly nominate the age for accessing their super.

These findings are mirrored in research by the Association of Super Funds of Australia (ASFA), which found only 51% of adult Australians (including around 60% of those aged 65 plus) have consulted any source of information on preparing for retirement.

ASFA noted the importance of good quality information in improving retirement income levels, as it assisted consumers to understand and set appropriate financial goals and employ the strategies necessary to reach them.

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Financial literacy and retirement comfort

Given continuing concerns about inflation and the cost of living, staying on top of your finances can help reduce stress around retirement planning.

According to the latest AMP Financial Wellness report, the cost-of-living crisis has left many Australians concerned about their finances. The report found 66% of Australians were feeling financially stressed and 54% never or rarely put away extra money for their retirement.

Among retirees, 40% were feeling some level of financial stress, with more than one in three Australians 65 and over feeling financially insecure and worried their savings would not last. 

According to the Vanguard report, a well-documented, detailed financial plan is one of the most effective ways to not only achieve a successful retirement but also to alleviate the emotional burdens and anxieties many people feel about their finances and their retirement.

It found retirees with a solid retirement plan were three times more likely to feel highly confident in their ability to support their desired lifestyle, and 65% more likely to have a positive outlook on retirement.

The report also noted that having a plan reduces retirees’ fear of running out of money, which is one of their biggest sources of anxiety.

“Being well-prepared can significantly improve Australians’ confidence about retirement, but planning is challenging without a solid understanding of the retirement system or basic financial concepts,” the study commented.

Surprisingly, there is even research indicating a significant relationship between a higher level of financial literacy and a reduction in hospitalisation for people aged 65 and over. Strong financial literacy is associated with better financial outcomes and less financial stress, which in turn leads to improved physical health outcomes and lower healthcare costs.

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So, learning more about your finances and better retirement planning may help make your retirement years both happier and healthier!

Importance of professional financial advice

Poor financial literacy skills also mean many retirees experience a lower standard of living in retirement than necessary.

The government’s Retirement Income Review found many retirees are too conservative and frugal when it comes to drawing down their retirement savings and, as a result, they had less money to live on. These retirees generally had low levels of financial literacy.

Feeling confident enough in your financial knowledge to seek professional financial advice can be key to a successful retirement. Failing to do so can undermine your retirement comfort.

A recent National Seniors Australia survey found one of the main barriers stopping retirees from obtaining financial advice was the “complexity of financial matters” and “not wanting to talk about their finances”. This is often due to poor financial literacy skills.

The Vanguard study found among participants who had received professional financial advice, 40% indicated they were extremely or very confident in funding their retirement, while only 22% of those who had not received professional advice felt the same way. The report also noted retirees who had a good idea or clear understanding of what actions they needed to take were three times more likely to feel highly confident in their ability to support their desired lifestyle in retirement.

6 tips for improving your financial literacy skills

Whatever your level of financial literacy, it’s important to keep learning as the financial landscape, including superannuation, is constantly changing. Every step you take towards getting a better handle on your financial situation helps you make more confident financial decisions and makes your retirement more successful.

Here are some simple ways to improve your skills in this area:

1. Check your situation now

Write down exactly where you are financially and get a clear picture of your personal balance sheet. Identify areas where you feel your financial knowledge is weak, or areas you would like to learn more about (such as super, the share market or the Age Pension rules).

2. Start with one area

If the process of retirement planning seems overwhelming, take it one step at a time. Choose the area you are most interested in learning more about – whether it’s investing, paying off your mortgage or how compound interest works – and tackle that one first. Then move on to other areas as your financial literacy skills improve.

3. Use government resources

The government is keen to help you learn more about your personal finances. ASIC’s Moneysmart website is a great place to start, with information about a range of topics covering managing your money, reducing your debts, planning your future and growing your wealth. The website also has useful tools and resources, such as budget planners, mortgage and super calculators, and advice on choosing a financial adviser.

4. Check your super fund’s website

Most super funds provide useful resources on their website. These include simple information about super and retirement, webinars, calculators and tools that help explain key financial concepts. Your fund may also provide access to basic, free financial advice to help you get on top of your super, or more comprehensive advice for a fee.

5. Read SuperGuide to learn more

A great way to improve your financial literacy skills is to read the huge library of articles available on the SuperGuide website. We cover every aspect of the super and retirement system, plus lots of useful information about investing, wealth creation concepts and financial products.

6. Talk to a financial adviser

A qualified independent financial professional can answer your questions and help build your knowledge and confidence about day-to-day money management or more complex long-term financial topics like retirement. They can also assess your current situation, help you formulate financial and personal goals and create a financial plan to attain them.

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