Growing older doesn’t mean getting wiser when it comes to financial decision making, according to recent research.
At an age when baby boomers are responsible for managing their retirement assets and distributions, and making complicated decisions on Medicare and Social Security, they could also face a decline in their mental performance and financial literacy.
Two separate studies by Professor Michael Finke of Texas Tech University and the Center for Retirement Research at Boston College found that older people gradually but steadily lose their ability to make sound financial decisions as they age.
According to the research, the ability to understand financial concepts and apply them properly peaks in the mid-50s and declines by 1% per year after age 60.
Ironically, the study found that confidence in financial decision making and investing ability remained constant or actually increased.
Declining aptitude and overconfidence is a bad combination and could spell trouble if seniors and their family members don’t take precautionary measures, such as financial planning, to avoid vulnerabilities.
Minimizing Poor Financial Decisions in the Future
A certain amount of cognitive decline is a normal process of aging, and acknowledging that your ability to make financial decisions will decrease is an important part of the retirement and financial planning process.
Jack Tatar, retirement expert and author of Having the Talk: The Four Keys to Your Parents’ Safe Retirement, says “there’s no need for baby boomers or their children to be worried, afraid, or uncertain about their financial future in retirement if you have a sound and regularly reviewed financial plan.”
- The first step is getting help from a financial advisor or Certified Financial Planner. Tatar says that advisors can play an important role in recognizing reduced cognitive ability to prevent financial mishaps. “You want an advisor who’s willing to put in the time and effort to make sure that you have a quality retirement plan,” says Tatar. Make sure to find an advisor who is willing to work with trusted family members and will facilitate the intergenerational aspect of family financial planning. If you’re searching for someone qualified to provide impartial, well-rounded retirement advice, visit the Financial Planning Association, National Association of Personal Financial Advisors, and the Certified Financial Planner Board of Standards.
- Simplify your financial affairs by consolidating retirement plans that are scattered among financial providers. This will make it easier to track your investments and calculate mandatory minimum withdrawals. The National Institute on Aging also recommends getting your financial paperwork and data together, including passwords, and storing it in a safe place where a trusted friend or family member has easy access in an emergency. The NIA has a list of all important paperwork and resources to help you plan for the future.
- Tatar says one of the most important things anyone can do is have “the talk” with your family to address all your estate-planning needs before it becomes an issue. Think about who will take over managing your finances, pay bills, file tax returns, handle investments, insurance and make medical decisions on your behalf. “Most often this is a family member and getting them involved early in the process to implement advance planning tools such as powers of attorney, will/trust, beneficiary designations, healthcare power of attorney as well as helping the parent with decisions will provide peace of mind for all, and create a plan that can survive the normal process of aging”, recommends Tatar.
While many people continue to handle their finances well into their later years, it’s certainly a good investment to prepare yourself and your family for the possibility that you may need to hand over the financial reins in the future.
Accepting and anticipating your declining mental capabilities and the vulnerabilities that come with it, will make it easier on you and your family members to provide the necessary financial, physical and emotional help when you need it the most.
Have you prepared for a decline in your ability to manage your finances as you age?