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"

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