Prepare for the Impact of Aging on Financial Decision Making

By Jane Young, CFP, EA

A major risk to aging investors is the loss of cognitive ability which directly impacts the ability to make rational financial decisions.  We are living longer and as we age the likelihood of cognitive impairment significantly increases. According to a University of Michigan Health and Retirement study, the incidence of mild cognitive impairment (MCI) increases from 9% in individuals aged 70-74, to 15% at age 75-79, 30% at age 80 – 84, and 37% for individuals over 85.  Severe impairment rises exponentially with age - more than half of the population over 85 experiences some form of cognitive impairment.

The Center for Retirement Research at Boston College found that MCI primarily impacts financial judgement and can be temporary or an early sign of dementia.  Those with MCI are unaware of their diminished capacity to make financial decisions.  Mild impairment impacts their financial judgement but not their ability to carry out financial decisions. As a result, they are at risk of financial fraud or exploitation. Individuals with more severe cognitive impairment are completely unable to manage their own financial affairs.

Few people have established a plan to manage the risks associated with cognitive decline. This is an unpleasant issue to consider.  Many are unaware of the prevalence of cognitive impairment and when it is likely to occur. There is also a psychological resistance that stems from the fear of losing independence, trust issues, over confidence, mortality anxiety, and being overly optimistic.  

You need to create a plan to proactively manage the risks before your cognitive ability starts to decline. A decrease in cognition is associated with a decrease in financial literacy.   However, it does not diminish one’s confidence in managing their finances and it is common for investors to think they are still making sound decisions.  

Only about half of those experiencing significant decreases in cognition are getting help with financial decisions. Those who manage their own investments are especially vulnerable because irrational decisions or unusual behavior can go unnoticed for years.

To prepare for the possibility of cognitive decline, get your financial documents organized. Consolidate, and simplify your accounts.  Identify a trustworthy person with whom you can share your financial information and who can assist you when you are no longer able to manage your own affairs.  This can be a spouse, family member, or close friend.  Provide your trusted advocate with authorization to view your accounts.  

Give your financial planner permission to contact a trusted person if they are concerned about your welfare.  Your financial planner is in the best position to notice a problem such as erratic behavior, an extreme change in strategy, the inability to reach you, or suspicious activity in your accounts.

Draft a durable financial power of attorney to facilitate the transfer of control of your assets to your trusted advocate when you can no longer make sound financial decisions.