The most astute among us can find it challenging to manage our finances at times. Even when working with an advisor, making decisions about how much money you need to live on, forecasting how long your nest egg will last, and taking required minimum distributions can be complicated and stressful.
The challenge can be magnified for those who begin to experience cognitive decline as they age and are making poor and/or risky decisions. How to recognize the danger in yourself or others is complicated. If and when to step in, and how to do that gracefully are difficult situations to navigate.
This scenario is becoming more common as lifespans increase and investors need to make financial decisions into their 80s and beyond. And with the shift away from defined benefit pensions to 401(k)s and other defined contribution plans, retirees and older investors will depend even more on their ability to make sound decisions.
A brief released by the Center for Retirement Research at Boston College reviewed the effect of cognitive decline due to aging on three aspects of financial decision‐making: financial literacy, individuals' confidence in making financial decisions and responsibility for managing finances.1 The Center concluded that cognitive decline has an adverse effect on financial literacy, but has virtually no effect on individuals' confidence that they can manage their finances. As a result of that confidence level, more than half of those with cognitive decline retain primary responsibility for their finances.
How serious are the declines? One study found a decline of 1% per year in financial literacy scores after age 60.2 Other studies found lesser rates, but because cognitive decline continues over many years, the effect can be significant, especially as people live longer. The most recent figures for life expectancy from the American Society of Actuaries show that women age 65 have a life expectancy of 23.8 years; for men age 65, it's 21.6 years.
Here are some changes in behavior that could indicate cognitive decline:
Generally, it's a good idea for retirees to plan ahead for a spouse, child or someone else to take over for them financially when they no longer can manage on their own. In some cases, a spouse might not be interested or have the ability to manage a portfolio. In those cases, a child or sibling can step in early, well before problems surface. It is smart to create a list of all of your key financial information and identify someone who can assume control if need be.
There are many options for transferring responsibility for your or a parent's finances, and that transition can be gradual. It can start with discussions about the overall financial plan and investment philosophy so there is a clear understanding of goals and objectives. Some investors set up a meeting with their financial advisor to help the process along.
Here are some recommendations for a spouse or child who needs to become involved in handling a loved one's portfolio and finances:
As difficult as it might be to face the possibility of cognitive decline, it's important to recognize that likelihood and prepare in the event someone must assume financial responsibility.
1 How Does Aging Affect Financial Decision Making? By Keith Jacks Gamble, Patricia A. Boyle, Lei Yu and David A. Bennett
2 Finke, Howe, and Huston (2011)