Risk Tolerance and Financial Knowledge in Retirement Preparedness: A Conceptual Framework Based on Prospect Theory for Malaysia’s Low-Income Workers

Retirement marks the transition from active employment to the end of an individual's working life. This is the period of life where individuals rely on accumulated savings or pensions to fund their daily lives. The increase in life expectancy, the ageing population, and the rise of pensioners with inadequate savings highlight the significance of retirement, particularly for low-income groups. In Malaysia, the situation is exacerbated by the current economic uncertainty, rising living costs, and data indicating that a significant portion of the B40 population has insufficient Employees Provident Fund (EPF) funds to support themselves even a few years after retirement. These issues highlight the importance of preparing individuals with low incomes for retirement at an early stage of their careers. The foundation of this study will be grounded in Prospect Theory, which elucidates financial decision-making in uncertain conditions. The paper examines the direct relationship between risk tolerance and retirement preparedness, with financial knowledge serving as a mediator. The proposed framework aims to clarify behavioral responses to financial risk and the importance of financial knowledge in improving retirement outcomes among low-income populations. By integrating behavioral finance principles, this study aims to contribute to the academic literature and provide actionable insights for interventions that promote financial well-being and retirement security among low-income groups.  This conceptual paper makes three key contributions. First, it extends Prospect Theory to the low-income group in Malaysia. Second, it positions financial knowledge as a mediating factor between risk tolerance and retirement preparedness. Lastly, it provides practical implications for policymakers, financial educators, and industry practitioners to address retirement insecurity among low-income groups in Malaysia. The framework also lays the groundwork for future empirical validation.