Death and taxes may be two certainties in life, but sadly, there is another. You are highly likely to become less capable of managing your money as you age.
Old age often comes with declining cognition, of course. And now, a study of elderly people over time has measured how even slight cognitive changes affect financial literacy and financial decision making. The results are sobering.
Even for people who experienced minor cognitive changes but didn't have any overt dementia, every one unit decline in cognition reduced the average number of financial literacy questions they could answer correctly from 70 percent to 60 percent, the researchers found.
"Even these subtle cognitive changes that doctors and others would consider normal in old age are driving down decision-making abilities and the financial knowledge that you need to make good decisions," said Patricia Boyle, a neuropsychologist at the Rush University Medical Center's Alzheimer's Disease Center and an author of the study.
The decline in financial decision-making ability wouldn't be quite so bad if people were retiring with defined benefit pensions. But those pensions are going out of fashion, and more and more aging investors are facing the prospect of managing their retirement finances on their own.
"These days we have 401(k) plans and lots and lots of choices that never confronted our parents. We have to choose how to invest our 401(k) plan balances. We have to choose at what speed to draw them down. We have to worry about the tax consequences. We have to worry about fees," said Anthony Webb, a senior research economist at the Center for Retirement Research at Boston College, which published the recent study.
"If you are really smart and you are in your 50s, this is something that you can handle, though the evidence is that a lot of people have difficulty even then," said Webb. "The problem for the future is, what do we do if we have a whole load of 80-year-olds who have Alzheimer's and have $1 million in their retirement plans? It's a recipe for disaster."
The recent study adds to previous research showing a decline in financial decision-making ability with age. One notable study found that financial decision-making ability follows a U–shaped pattern, improving in youth and peaking at age 53, and then declining.
Studies have also shown that confidence in one's financial decisions does not decline at the same rate as ability.
"You see very often the person who has some cognitive impairment, but at least insists externally that they have never been better," said David Laibson, a professor of economics at Harvard and one of the authors of the study identifying the U–shaped pattern. "If people were more aware and able to acknowledge their changing capacities, they would be more comfortable delegating those important decisions to others." But because they're not, he said, "we end up in a world where there is very little delegation, and often things end badly."
The problem of declining cognition is especially acute among women. They tend to live longer than men, and old age is a major risk factor for developing Alzheimer's disease. Largely because of their longevity, women account for almost two-thirds of Americans with the disease, according to the Alzheimer's Association.
Men don't get off scot-free: a study of nearly 2,000 Americans aged 70 to 89 found that 16 percent of them had some form of mild cognitive impairment, and the rate was higher for men than for women.
Still, with men being at least six years older than their female partners in nearly 1 in 5 couples, "men who do have reductions in cognitive capacity end up very often with a caregiver who can watch over them and their finances," said Laibson.
Adding to women's challenges, they tend to accumulate less in retirement savings, thanks to time out of the workforce and the wage gap, and have generally lower levels of financial literacy and confidence. Just 20 percent of women feel very prepared to meet their long-term financial goals, a figure that has remained largely unchanged for a decade, and only a third of women believe they are in good shape when it comes to retirement savings, according to a study by Prudential.
And women are particularly vulnerable to elder financial abuse—they're almost twice as likely to be victimized as men, according to one study.
There are a few efforts underway to protect both men and women from the financial risks they face as their cognitive abilities decline. The Consumer Financial Protection Bureau offers financial education targeted at older Americans, for example. And some states, like Illinois, have adopted specific measures to try to prevent seniors from being financially exploited.
On the savings front, regulators have proposed new rules aimed at encouraging older Americans to allocate some of their retirement savings to annuity contracts that will pay out late in life.
Awareness of the problem is growing. But for now, old age can hit your wallet as well as your health.