Age-Related Financial Vulnerability: Why Making Financial Decisions Might Be More Difficult as You Get Older
All kinds of things happen to our brains and bodies as part of the normal aging process. And while we might prefer to ignore getting old, sometimes it is useful to know what might happen in the future so we can make better plans now.
Researchers have discovered that as we get older, core financial skills can become diminished. Researchers call this age-related financial vulnerability. Our cognitive abilities change in a way that can negatively impact our capacity to make good financial decisions. Becoming victim to fraud as a result of a decline in these capacities is of particular concern.
Good News and Bad News About Financial Decision-Making as You Age
First, the good news. Some research has found that older adults’ make better financial decisions due to their higher levels of experience‐based financial knowledge and lower levels of negative emotions about money.
The bad news is that as we age, our brains change and that can cause us to make questionable money decisions and be easier prey for financial fraudsters.
The really bad news? Researchers from Texas Tech and the University of Missouri found that financial literacy scores decline by about one percentage point each year after age 60. Scores decline across a variety of financial topics: general financial literacy, investing, borrowing, and insurance.
And, the kind of scary news? Studies suggest that our confidence in our financial decision-making increases as our actual abilities to make good financial decision declines.
Age-Related Financial Vulnerability is a Much More Subtle Problem than Dementia
Sure, some of us will succumb to dementia or a physically debilitating disease that will impact our ability to make good financial decisions.
However, many more of us will experience much more subtle changes that could impair our ability to manage our money.
The exact possible causes of age-associated financial vulnerability are not known. It is most likely that a combination of factors contributes to diminished financial decision-making capacity.
One area that has been studied is executive dysfunction. Research has found that executive function shows a significant decline beginning at age 60. This is associated with age-related atrophy of the prefrontal cortex, cerebral white matter disease, and cerebral microbleeds. This deterioration results in a reduced ability to multi-task, organize by time, and abstractly comprehend the future ramifications of current financial actions.
Other brain changes may also contribute to age-related financial vulnerability.
11 Ways to Protect and Prepare Yourself for Declining Financial Capacity
If your financial decision making gets worse as you age, what is the worst that can happen?
There are two areas of concern. You want to protect your money from:
Financial abuse against older people is a major problem that is getting worse.
According to the F.B.I.’s Internet Crime Complaint Center (IC3), the total losses reported by scam victims increased to $3.5 billion in 2019 from $1.4 billion in 2017. And, a Truecaller survey (administered by Harris Polling) found that that 22 percent of American adults said they had lost money to a phone scam in the past 12 months. And, they project that as many as 56 million Americans may have been victimized this way, losing nearly $20 billion.
Furthermore, older people may be far more likely to fall victim than those younger.
You want to have some safeguards in place so that you yourself don’t make a bad decision.
Here are 11 steps you can take to protect your money:
1. Increase Your Financial Literacy Now
A lack of financial literacy is an important driver of poor financial decisions (above and beyond age itself). The more you know about managing your personal finances, the less risk you might have of making a financially hurtful move.
Here are a few resources for increasing your financial literacy:
- Read books about retirement and aging
- Join the NewRetirement Facebook group. It is a great place to engage with others on personal finance topics in a supportive environment
- Subscribe to reputable financial planning media and read personal finance news regularly. Some reputable sources include: Money Magazine, Forbes Magazine, Marketwatch, Bloomberg Businessweek, and others
2. Use it or Lose it
You want to get in and stay in the game when it comes to making financial decisions. Make managing your money a regular habit.
Creating and maintaining a detailed retirement plan is a good way to take consistent responsibility for your finances. The NewRetirement Planner makes it easy. And, you can learn a lot as you run different scenarios and keep your plans up to date.
You should also consider doing daily or weekly practice in math. Don’t let the computational parts of your brain atrophy.
3. Set Up Proper Legal and Financial Documents
It is critical that you have estate plans in place.
In particular, you need a power of attorney and a health care directive. These documents will enable a spouse, adult child, or close friend to make decisions about your finances and medical care if you’re unable to make your wishes known.
Here is a review of the 11 estate planning documents you should have.
4. Take a Self Assessment
Dr. Peter Lichtenberg is one of the country’s leading experts in the prevention of financial exploitation in older adults. He and his team have developed a quiz to help people determine if they are at greater risk of age-associated financial exploitation or diminishing financial capacity.
You probably don’t want to know if your brain is faltering, but it is useful to be aware.
5. Simplify Your Finances
As you get older, you may want to simplify your finances by consolidating accounts and reducing your overall number of investments. It may also be a good idea to shift to less complex portfolios and fewer investment choices.
Author of The Simple Path to Wealth, JL Collins was on The NewRetirement Podcast and spoke on the importance of simplicity, and that there indeed exists a simple path to financial security.
6. Sanity-Check Decisions with a Fiduciary Financial Advisor
Setting up a regular meeting with a fiduciary financial professional to simply review big financial decisions can be a good idea. Their guidance can help ensure that you are making rational choices with your money.
NewRetirement offers fiduciary advice from an independent fee-only Certified Financial Planner. Consultations are by phone or video call and, by using the NewRetirement Planner, the process is collaborative, cost effective, efficient and effective.
7. Enlist Someone You Trust
If not a fiduciary advisor, you might want to enlist a family member or friend to help you monitor your financial situation on a monthly, quarterly, or annual basis.
However, do choose carefully. According to a widely cited MetLife Mature Market Institute survey of reported financial fraud, 51% of the scammers were strangers and 34% were family, friends or neighbors. More recent data from the Keck School of Medicine at USC found that relatives may pose a higher threat to financial elder abuse than strangers.
8. Consider Identity Theft Protection Services
The Federal Trade Commission lists and discusses the different types of identity theft protection services.
9. Be Aware of Scams
Studies show that being aware of scams can protect you from being the victim of one.
You can sign up to be alerted to current scams on the AARP Fraud Watch Network.
10. Set Up Alerting Systems
You can set up systems with credit agencies and financial institutions. They will notify you (and/or someone close to you) if a new account is opened or a large withdrawal or transfer is made.
11. Put Yourself on Do Not Call Lists
Most telemarketers will stop calling once a number has been on the National Do Not Call Registry for 31 days. You can register home and cell phone numbers free at www.donotcall.gov or by calling 888-382-1222.