Personal Finance

When parents can't manage their money

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Maybe your mother is suddenly having trouble balancing her checkbook, or your father can't seem to pay his bills on time. Perhaps a parent has called you to brag about a hot new stock someone's nephew encouraged them to buy.

There comes a time in many people's lives when managing their money is out of their reach. If it's happening in your family, experts say you need to act—now.

The big question in many families is how.

First, recognize that this is a surprisingly common situation. One study by researchers at the Federal Reserve, Harvard, New York University and the University of Singapore, found that financial decision-making abilities peak around age 53. It goes downhill from there. The study also pointed out that about half of all adults between the ages of 80 and 89 either suffer from dementia or have a diagnosis of cognitive impairment without dementia.

Some elderly people suffer from physical ailments that impede either their cognitive abilities or their physical ability to manage their finances. Connie Stone's grandmother gradually lost her eyesight, and that naturally made it much harder for her to keep a handle on her checkbook.

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Whatever the cause, when elderly people lose a handle on their finances, the risk of financial missteps – or worse – increases rapidly. A study by MetLife found that losses by victims of elder financial abuse come to at least $2.6 billion every year.

"The best thing would be in advance of all this to have a conversation with the parents," said Stone, co–founder of Stepping Stone Financial. "It can make a big difference down the line."

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There are several typical warning signs when people start to lose the ability to manage their money, experts say. And it pays to be watchful: Parents aren't likely to recognize their own declining abilities.

In a study of financial knowledge by FINRA, the Financial Industry Regulatory Authority, people who reported being more confident in their financial decision making than they were five years ago had slightly lower cognition scores than those who said their confidence was unchanged. In the Fed's Older Adult Survey, 96 percent of respondents age 70 or older said they were just as confident or more confident in their decision-making than five years earlier.

If an elderly person suddenly changes investment strategies—if a normally cautious investor suddenly gets excited about a new, high-risk security, for example—that is often a red flag.

Getting behind on bills is another potential warning sign, especially if it's someone who has been very organized in the past. Calls from creditors may be a signal that someone can no longer keep track of bills or is facing some other financial challenge worth surfacing.

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If someone has always been careful about filing and record-keeping and now the papers are piling up, that may indicate a problem. The same goes for a sudden rash of expensive purchases that seem out of character.

Watch out as well for an onslaught of charitable solicitations, experts say, or a bunch of expensive purchases.

Barry Glassman, president of Glassman Wealth Services, said he has brought in a client's son or daughter (with the client's permission) on at least two occasions when he became concerned about slipping cognition and questionable transactions. "As soon as the son stepped in we were able to see that there was a financial predator."

Often, the best way to approach the issue of personal financial management with an elderly parent is indirectly, experts say.

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"You have to get them in to see third-party objective people," Yankee said. "Have them go in and talk about the importance of having it so that they are being taken care of."

That third party could be a respected family friend, an accountant, a lawyer or a financial advisor. Yankee actually makes it a practice to create that third-party option for clients, having them sign a form identifying people Yankee and his colleagues can contact if they have concerns about the client's health or well-being. He started with clients turning 80, but has now signed the form with clients as young as 62.

Janet Stanzak, founder of Financial Empowerment, a financial advisory firm, suggests an open-ended question to get a discussion going. "Find a track where we are asking questions that open the door for them to start the conversation," she said. She suggests questions like, "I noticed you opened a new account. How is that working for you?"

Another option is to try and make a money management task a joint effort. Suggest that you balance your parent's checkbook while they find a place for the two of you to go out to lunch, for example. That will also give you a glimpse of your parent's finances.

However you approach this issue, remember that for the aging parent it is a scary one. Giving up control of one's money can be even more painful and challenging than handing over the car keys. It's essential to handle the conversation in a way that maintains everyone's dignity.

But even though the discussion may be especially fraught, it's incredibly important.

Yankee said he intends to have it as soon as it's practical in his own family.

"I'm in my 40s. I'm obviously not going to have that conversation with my kids yet. But when my kids are of an age to be responsible, where I might make them my health-care proxy, in their late 20s or so, I would have that conversation," he said. "You're never as sharp again as you are today."

By Kelley Holland, special to CNBC