Studies conclusively demonstrate that mathematical reasoning and financial acumen peak at around age 53, and then gradually begin to decline with age, accelerating as people age into the 70s and 80s. What are the implications for retirees?
In the age of Do It Yourself, more and more people have been accustomed to managing their own finances, and making their own decisions. There is plentiful information on the internet to do ones own research, while the rise of index funds and online brokers have made it relatively easy for people who are so inclined to manage their own finances.
But what happens as cognitive capabilities begin to decline? (this is not an IF - but a WHEN!) Seniors entering retirement often find that financial decision making gets a whole lot more complicated - just as their abilities to deal with that complexity are starting to decline. Suddenly they are faced not only with investing - but managing multiple income streams, creating and sticking to a budget, more complex taxes, and conflicting investment goals. Furthermore, not everyone will be aware of their own limitations, as most people tend to be overconfident regarding their own abilities – particularly if they have been “doing this all their lives”. Too often it takes a major financial mistake before seniors (or their family members) realize that financial abilities have slipped.
It’s not just about investments and budgets either. Seniors face a slew of financial decisions – many of them quite complex, which younger folks typically don't face. Take Medicare Prescription Drug coverage for instance. Congress should be taken to task for developing any program for seniors to be this complicated. And options for Medicare supplemental coverage, reverse mortgages, long term care insurance, etc. are not much simpler. Very few older seniors are capable of making sense of these programs without some kind of assistance. Where will that assistance come from?
Hey, even your trusted advisor needs to admit he is now over the hill in terms of financial cognition (albeit only be a couple of years!). That has me thinking – I need to re-start work on that succession plan! None of us are immune to advancing age - so I am duly reminded that I won’t be able to do this forever!
This article in Kiplingers (How Aging Imperils Your Finances) is enlightening and offers more detail on the topic, with specific suggestions (including Keep It Simple Stupid). I particularly like the recommendation in the final paragraph – hire an advisor to help manage your financial affairs. We know a good one!