Thursday, October 29, 2015

Aging's Impact on Financial Decisions

Financial capacity — the ability to manage your money to meet your needs and match your values — is one of the first things to go when you have mild cognitive impairment.

Richard Eisenberg writes that this is the condition of people who have mild problems with thinking and memory. Mild cognitive impairment can be an early sign of Alzheimer’s disease and affects about 5.4 million Americans; 22 percent of people 71 and older have it.

America’s ‘Financial Capacity’ Problem

If you have elderly parents or want to prepare yourself for the chance that you may face serious cognitive decline issues someday, you’ll want to know some tips.

The Good and Bad News

Eric Johnson, director of the Center for Decision Sciences at Columbia University’s business school, says he had bad news and good news. His bad news: everyone loses what’s known as fluid intelligence as they age — that’s the ability to learn and process information quickly.

His good news: The other type of intelligence, known as crystallized intelligence — think of it as your knowledge of the world — grows until you’re around 65. “It’s why people are better at doing the New York Times crossword puzzle in their 60s than in their 20s,” said Johnson.

Consequently, he said, cognitive collapse is compensated by an increase in crystallized intelligence.

When Financial Decisions Grow Harder

But this was disturbing: Johnson says bluntly that “after 60, it’s harder to make good financial decisions” because we lose our fluid intelligence over time.

Financial literacy declines in later life and investment skills deteriorate sharply around age 70.

More troubling: 
Annamaria Lusardi, an economics professor at George Washington University’s School of Business, surveyed older people and found that although they scored low on questions about financial literacy, they gave themselves high rankings.

So, not only do older Americans have trouble making wise money decisions, they don’t realize when they’re making bad choices, which can make them easy prey for con artists and unscrupulous financial firms.

That’s one reason why 
older victims of financial fraud lose $2.9 billion annually, according to a 2011 MetLife analysis, and why elderly people pay some of the highest costs for debt. In one study, 75-year-olds shelled out about $265 more annually than 50-year-olds for home equity lines of credit.

The Form That Can Help
Holly Deni, a financial gerontologist who runs ElderLife, an eldercare advisory service based in Little Falls, N.J., advises get a power of attorney drawn up for your parents, elderly single relatives and — perhaps most importantly — yourself. “Anyone who doesn’t have a power of attorney should get one because any of us can fall into incapacity at any time,” said Deni.

Helping Your Parents Gradually

She also suggested that if you notice your parents beginning to have trouble managing their money, assist them incrementally. “Start by setting up a bill-payment schedule and automatic bill paying. Then, become a co-signer for one of their small financial accounts,” she advised. “Then, find out where there important financial papers are.”

Dr. Carolyn McClanahan, a physician and director of financial planning at the Life Planning Partners firm in Jacksonville, Fla., said helping your parents consolidate their accounts can prevent them from becoming victims of financial fraud. “Consolidate as much as possible," she said, "because the more accounts that are floating out there, the easier it is for someone to get their fingers on one.”

The Person You Need to Know

One more tip to protect your parents with financial capacity challenges: Meet with someone who works at your parent’s bank.

“If your loved one frequents one bank, they get to be known there,” said Deni. The bank employee can then let you know if he or she has noticed anything of concern — a pattern of unusually large withdrawals, for instance.

Adapted from Richard Eisenberg article "How Aging Impacts Our Financial Decisions"

© Twin Cities Public Television - 2015. All rights reserved.

Monday, October 19, 2015

5 Pieces of Bad Retirement Advice

One size doesn't always fit all, especially when it comes to retirement advice. In fact, some of the most time-honored rules of thumb for managing your finances after the end of your primary working years may not make sense in your specific situation.

On the other hand, they might make perfect sense. As is usually the case, whether retirement advice can be classified as good or bad for you really depends.

Bankrate presents arguments from the standpoint of the devil's advocate to help you see the old standards in a new light. If nothing else, this exercise may help induce a healthy dose of skepticism when you hear or read advice that passes itself off as the truth.

Reconsider these potentially ill-conceived retirement solutions

1. You can always work
Not so fast, says Gail Cunningham of the National Foundation for Credit Counseling. While Cunningham agrees that working has many pluses -- not only does it boost income, but it's good for your mental and physical health -- too many unknowns make it chancy to count on a job as part of your retirement package.

She says a lot can go wrong with plans to work into perpetuity:
  Your health can decline.
  Your spouse's health needs may cast you into the role of caregiver.
  Your company may have other ideas.
  Circumstances could make a move away from your job's location attractive.

Plan to work if you want, but don't make it a necessary part of your financial equation.

"Continuing to work is a plus, but only if it's on your terms," Cunningham says

2. Pay off the mortgage
While getting rid of debt doesn't seem like it could have a downside, there are circumstances where paying off a mortgage might not be such a great move.

Michael PeQueen, managing director and partner with HighTower Las Vegas, a financial planning firm, says the decision to rid yourself of a mortgage is often an emotional decision rather than a financial one.

Sure, a paid-for home can bring peace of mind, but it's not always the right strategy. Depending on the interest rates involved, it might make better financial sense to invest the cash that would go into freeing yourself from your low-interest home loan and instead put your money into higher-yielding investments.

PeQueen explains how it works: "Let's say a female becomes a widow in her early 60s. That could leave her 30 or 35 years worrying about inflation taking a significant portion of her portfolio. Locking it into a guaranteed low rate of return by paying off a fixed-rate mortgage really could cost her tens of thousands, if not more, over her lifetime," he says

3. You will need “X” amount per year…..

You do the math and decide you need $80,000 a year to retire, so you want to put everything in relatively safe vehicles to generate that amount. Fine, but that's based on the value of today's dollar. What will it take to maintain your lifestyle in 10, 20 or even 30 years? It's not that easy to quantify what you'll need in the face of unpredictable inflation rates.

David Twibell, president of Denver-based Custom Portfolio Group, says when investors grab numbers out of the air, they often forget that their money -- while theoretically growing over the years -- will be worth a lot less based on inflation.

Consider that in January 1975, the inflation rate was 11.8 percent. March 1980 brought inflation up to a whopping 14.8 percent. The past few years have seen a relatively low rate of inflation, but some say that won't last.

Even if it stays at a benign 3 percent a year, over time your purchasing power erodes significantly. A thousand dollars today would be worth $412 in 30 years.

That unpredictability is why Twibell advises against overloading your portfolio with fixed-return vehicles like bonds and annuities with a low rate of return.

"The typical response I get when initially talking about retirement planning is, 'I just need $80,000 a year.' Obviously, $80,000 today is far different from $80,000 two decades from now," Twibell says.

4. Its smart to downsize
Getting rid of the big house once the kids are gone may seem like a good idea. But like any other type of financial decision, it's good to crunch the numbers first and not simply assume that downsizing is right for everyone.

HighTower Las Vegas' PeQueen says the fees to buy and sell a home, plus the costs of moving and preparing both homes for these transactions, can negate any financial gain for at least the first few years. And, PeQueen says, a smaller home doesn't necessarily translate to a lower cost of living.

"In downsizing to a better location, for example, you have to factor in the increased costs, such as homeowners association fees and a higher tax rate," he says, adding that surviving spouses often opt for downsizing because memories of happier times prove difficult and they want a new start emotionally.

"And that's fine, but you also need to look at all options because holding onto their current home could actually be the cheaper option," PeQueen says.

5. Skimp of 401K savings
Sometimes life pelts you with not-so-great surprises; you're short on cash due to medical bills, home repairs or college expenses. Your budget is already tight, so how do you come up with the money you need? That 401(k) nest egg looks mighty tempting to tap, but you've heard enough times that it's not a good idea. So how about lowering your retirement contributions to increase your income temporarily?

Experts say the solution to your cash flow problem may take some creative thinking (an additional part-time job, working overtime, selling something). But you should not sacrifice your 401(k) contribution.

"Stopping 401(k) contributions is convenient when times are tough," says Ted Lakkides, CFP professional and founder of Cygnet Financial Planning, "but there are (plenty of other) items that can be trimmed off a budget if a person has the guts to look."

Lakkides says it's best to comb through current expenses to find that cash, but if lowering your retirement contribution can't be helped, then avoid going below the employer's match point. If you feel you must do so, maintain at least a 1 percent contribution, he says, and hike it to former levels or higher as soon as possible.

He provides this warning to those who do give in and lower their 401(k) contribution: Be prepared for major tax-time sticker shock.

"They will owe income taxes on the extra money they didn't put in their 401(k)s," he says.