trendspotting | PLANADVISER March/April 2017

The Effects of Aging on Saving

Financial decisions become harder

By Javier Simon | March/April 2017
Art by Eron Hare

Most people lose “fluid intelligence,” or the capacity to process new information, as they reach their 70s and 80s, according to a new study by the Center for Retirement Research at Boston College (CRR).

This puts retirees lacking effective money-management skills at risk of losing their ability to manage financial affairs in their own best interest. In fact, the CRR study found that “financial novices” in particular may need substantial guidance in managing their assets as they reach retirement age.

The challenge is obviously even greater for people who are at risk of developing severe cognitive impairments, a group that which the CRR projects will grow to include more than a third of people reaching their 80s. The combined decline in fluid intelligence and diminishing financial capacity can make these groups especially vulnerable to fraud and financial abuse, highlighting the need for a trustworthy professional to step in.

The CRR says most financial novices will bounce back with the right guidance. It also concludes that most people in their 70s and 80s will still be capable of making sound financial decisions because financial capacity relies largely on accumulated knowledge, which remains intact for people experiencing normal cognitive aging. This knowledge is reinforced through financial actions such as understanding how to read, pay and dispute bills; knowing when and how to use a check; and understanding concepts such as debt, insurance and asset returns.

Still, the findings could be of growing interest in light of the quantity of research showing that many Americans are challenged by financial wellness issues. Moreover, if they fail to develop financial judgment, which requires a combination of accumulated financial knowledge and fluid intelligence, even those with only mild cognitive impairment will be at risk.

The potential problems multiply for those with full-blown dementia, most common among people in their 80s and 90s, the study finds. This is particularly concerning as several studies show Americans’ longevity is increasing. Advisers with clients undergoing mental dips should pay particular attention to how these individuals comprehend financial tasks.

Even those suffering from only early stages of dementia have trouble performing tasks requiring financial judgment, the study says. One study cited by CRR found that 95% of adults with no cognitive impairment were able to manage their finances compared with 82% with mild cognitive impairment and just 20% for those suffering dementia.

The percentage able to manage their finances

No cognitive impairment
Mild cognitive impairment
Source: Center for Retirement Research at Boston College