Popular Stories

Financial Decision Making Worsens With Age. Here’s How to Help Your Future Self.

Dreamstime

If you’re in your 60s, you probably don’t do calculations as quickly as you used to. It might take you a bit long longer to learn the nuances of a new investment. Yet when researchers test the financial decision-making capacity of people in this age cohort, they often perform as well or better than younger people. What they’ve lost in processing power, they have more than offset in experience.  

But eventually with normal aging, say in your late 70s or 80s, financial decision-making tends to worsen. You may overreact to market downturns, or underreact to financial problems, or forget to pay bills. And older people are more vulnerable to scams. 

Such changes in your brain are predictable and you should start preparing for them long before they pose problems, financial pros say. Simplify your affairs, getting rid of unnecessary accounts and credit cards. Consider annuitizing part of your investment portfolio to create a regular monthly check. And most importantly, identify someone who can step in when you need help running your affairs.

Indianapolis advisor Susan Elser says her clients simply need more help as they age. “The older they get the more assistance they need in things like tax preparation, what documents do they need for their CPA, what’s the best way to give to charity,” she says.

Leslie Taylor, a 66-year-old professor of theater arts at Emory University in Atlanta, had a father who was afflicted with Alzheimer’s disease toward the end of his life. Now, she takes a battery of mental tests twice a year as part of an Alzheimer’s study. Taylor continues to perform well in the test overall but says she struggles in one part where she is supposed to instantly recall fast moving shapes.

“My reaction time and my ability to process has probably diminished,” she says. 

Taylor adds: “I wouldn’t think of it as an incapacity. It’s just that your brain changes as your body changes.” Taylor began using a financial advisor, Margaret Kulyk, several years ago to make sure that she stays on top of things as she prepares to retire at age 70. 

Compounding the problem is that many seniors refuse to acknowledge deterioration in their mental capacities, research has found. Michael Finke, a professor of wealth management at the American College of Financial Services, likens it to older people whose driving skills have eroded but who won’t give up the keys “All of us have had the experience of driving with a 90-year-old, and you realize after a few blocks, if you’re sitting in the passenger seat, you’re sitting in the wrong seat,” Finke says.  

Just like driving, seniors should try to belt in their finances before the road gets bumpy. We’ve talked to academics, medical experts, and financial advisors to put together a safe course for older Americans.

Simplify Your Finances

Are your finances a labyrinth that only you can navigate? Carolyn McClanahan of Jacksonville, Fla., is both a medical doctor and financial planner. She advises seniors to limit themselves to one bank account, one brokerage account, one individual retirement account and so on.

“The problem with cognitive decline and dementia is it’s really complex,” she says. “I’ve seen people do great in their 90s and others start to have problems in their 50s.”

She goes on. “You should set up your finances just assuming you’re going to have cognitive decline and dementia. That makes it easier for someone else to step in.”

McClanahan often advises clients—depending on their health—to delay taking Social Security as long as possible, even if it means spending down assets. Some academics recommend that retirees go further and supplement Social Security with low-cost income annuities to create a more pension-like stream of income.

Ye Li, an assistant professor of management who researches decision-making at the University of California, Riverside, recommends that retirees supplement Social Security with low-cost income annuities to create a more pension-like stream of income. “Essentially pensions sort of dummy-proofed retirement savings and now people are stuck with their own bad choices,” he says.

Create a Plan to Fund Retirement

Financial advisors typically create a plan for clients that analyzes both spending and sources of income.  You can do the same thing on your own.

Don’t just wing it on spending. Look at a couple of years of bank statements and credit card statements to get an honest assessment of your burn rate. Leave some wiggle room in your calculation for emergencies like buying a new car or a major home repair.

Then add up all your sources of income, starting with Social Security, private pensions, rental properties and finally your investment portfolio. Delineate how you want that portfolio invested, what percentage in stocks and bonds, or which mutual funds you’re using.

If you think you’ll need to work to help your retirement finances, that’s not entirely bad. Working, or anything that brings you in contact with more people, happens to be good for your brain, researchers say.

Identify Someone Who Can Step In

Many people select their spouses as their emergency surrogate, but at least one of your backups should be substantially younger than you are. That person should get a copy of your financial plan so he or she can see the big picture. If you have a financial advisor, your backup should try to sit on some of your meetings.

Rob Lyman, a Los Altos, Calif., financial advisor, says when he discusses estate planning with clients in their 50s or older, he asks them to sign a confidentiality release that allows Lyman to alert a designated person if he sees signs that a client is slipping mentally. Lyman hasn’t had to step in, but anticipates he will in the future.

“You can’t write a formula,” he says. “Everybody degrades in a different way. You have to be very sensitive to how the person was formerly.”

Things can get dicey if retirees don’t identify a backup person. Chicago financial advisor Cicily Maton years ago had a client who suddenly started showing signs of mental decline, including once forgetting what street she lived on.

Maton pondered what to do. The client had always been independent, and hadn’t picked a surrogate. 

Maton asked the client for permission to mail out a detailed summary of her personal finances to the client’s six children scattered around the country. “I didn’t have permission to tell them she was declining,” Maton says. “I had permission only to send them information. “But they got the message and came back and helped their mother.”

Don’t Forget Your Heirs

McClanahan, the Jacksonville advisor, was called in to help a man in his 90s who had amassed a $6 million fortune by buying stocks and holding them forever. But he had lost track of his investments, and his children would have had a hard time sorting everything out after he died.

Even worse, his estate plan made no sense. He was leaving stocks in his brokerage account to charity and his tax-deferred savings accounts to his children. This was backward. His children could inherit the stocks in his brokerage account tax-free. But they would have to pay hundreds of thousands of dollars in taxes if they inherited a tax-deferred account.

McClanahan had the man change his beneficiaries so that his tax-deferred account went to charity and change his will and trust so that his brokerage account went to the children.

“It would have been a nightmare,” she says. “We cleaned all that up.”

Write to [email protected]

View Article Origin Here

Related Articles

Back to top button