As you approach retirement, it’s important to anticipate potential challenges that may affect your financial well-being. Cognitive decline, a common aspect of aging, can impact your ability to make sound financial choices. Knowing how cognitive decline can influence your financial decisions can help you prepare for a secure retirement.

Cognitive Decline

When you’re planning for retirement, it’s important to account for the possibility of cognitive decline in your later years. As you get older, in other words, your ability to make decisions and analyze finances may be limited by the normal aging process.

Researchers have found that financial literacy declines with age, even as confidence in financial decision-making increases. This combination, researchers say, explains some poor credit and investment choices made by older people.

A study at the Center for Retirement Research found that more than half of people develop cognitive impairment by their late 80s. These researchers found that “normal cognitive aging can lead to financial mistakes because people lose much of their ‘fluid’ intelligence — the capacity to process new information — by the time they reach their 70s and 80s.”

The good news is, they said, “retirees in their 70s and 80s are often just as able to pay the bills, handle debt and maintain good credit as workers in their 50s and 60s.”

This is because people can rely on knowledge they’ve accumulated throughout their lives, as opposed to processing and learning new information. So, people with experience in managing their finances are better positioned to weather financial challenges as they age, according to these researchers. Those facing more difficulties tend to be those who lost a spouse who had managed those responsibilities.

The researchers concluded that retirees with normal cognitive aging who are financial novices may need varying degrees of help. Without access to trusted expertise, they will be at risk of serious mistakes. Those with cognitive impairment “face greater challenges,” including becoming targets for fraud and financial abuse from caregivers.

The Society of Actuaries has identified some areas of concern for people in their 80s when it comes to financial health. These include:

Financial Health Concerns for People in Their 80s

It’s important for people who assist in making financial decisions to have the right legal documents and authorizations, such as viewing authority on bank accounts or a legal Power of Attorney document. They also need to know how to find and access all relevant financial information, including assets. They should know, for example, about the locations of safes and safety deposit boxes.
Often, older people are inundated with solicitations from charities. Family members and caretakers should keep an eye out for this and help to keep this from becoming overwhelming. It’s helpful if the retiree lets caregivers know in advance what their preferences are regarding charities. Then, those wishes can be respected later, should it become necessary for the caregivers to make decisions.
Seniors who have limitations, such as difficulty driving a vehicle, may have trouble accepting their condition. Caregivers and family members are consequently faced with difficult situations in ensuring health and safety.

Compensating for Cognitive Decline

The Society of Actuaries suggested arrangements that offer financial and legal protection for those with dementia.

Financial and Legal Protection Options

Lifetime Annuities
An insurance company manages the money used to purchase an income annuity and makes regular payments to the annuitant, removing the need for the retiree to make investment decisions.
Trust Arrangements and Power of Attorney
Having a reliable trustee or someone given the power of attorney to make legal and financial decisions when the retiree is unable can provide needed protection.
Instructions to Advisors and Family Members
Clearly communicated and written instructions to people who will make decisions or provide advice can mitigate problems in the future and empower individuals to make the right choices for retirees.
Money Management Services
A professional money management service can help with bill paying and everyday money management if the retiree is unable.

Although it may be uncomfortable, consider the possibility that you may need assistance with financial responsibilities in your later years and plan accordingly. There are many advisory businesses that specialize in support for clients with diminished capacity. These businesses may include in-house legal and tax professionals as well as support structures to monitor and maintain the safety and security of their clients. 

Editor Bianca Dagostino contributed to this article.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: January 3, 2024
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