MAKING SENSE -- October 3, 2013 at 11:35 AM ET
Financial savvy peaks at age 53: what to do when you get stupid
Make your financial decisions and establish a source of guaranteed income before your mental capacity to do so declines, says Lew Mandell. Photo courtesy of Flickr user Keoni Cabral.
Lew Mandell, author of "What to Do When I Get Stupid: A Radically Safe Approach to a Difficult Financial Era," has been a frequent contributor to the Business Desk lately. He first made a splash extolling the virtues of annuities in "An 8.3 Percent Return on Your Money, Guaranteed for Life?" and recently followed that up by answering readers' questions about what he calls "the best retirement deal on the market." He's also explained his number one recommendation for a secure financial retirement -- all with the goal of helping seniors maximize their savings for when they'll really need them. But around the time boomers will really need those savings, they may no longer be able to manage them effectively. Here Mandell makes the case for establishing your financial plan and setting up a source of guaranteed income early -- before you lose your financial acuity.
Lew Mandell: As we move through middle age, our ability to manage our finances tends to peak, on average, shortly after our 53rd birthday, and declines thereafter. By the time we hit 70, this rate of decline steepens precipitously. This is the opening theme of my new book "What to Do When I Get Stupid."
The relationship between age and financial capability is a function of two offsetting aspects of intelligence. As we get older, experience makes us better able to cope with a variety of familiar problems. This is called "crystallized intelligence." However, past the age of 20, the analytical ability we need to perform new tasks declines steadily. This is called "fluid intelligence." Since the intelligence we gain from experience increases more and more slowly after some three decades of adult experience, our steadily declining fluid intelligence ultimately offsets the gains from experience, causing most of the decline in our mental capacities including financial capability. (Check out Paul Solman's animated explanation of Harvard's economist David Laibson's graph demonstrating this relationship and see Making Sen$e's full segment below.)
Adding to this decline is the beginning of age-related neurological problems including dementia and other types of cognitive impairment. Overall cognitive impairment affects 21 percent of us in our 70s, increasing to 53 percent of those in our 80s and 76 percent of those over 90.
The ability to make investment decisions has been found to peak at about age 70, somewhat later than other types of financial decisions such as those that relate to the use of debt. This is probably due to the fact that many adults focus on their investments only later in life when they have both assets and the time to think about them. Experience with investments tends to come later, thus abilities peak later.
Unfortunately, studies have found that as people get older, their confidence in their abilities to make good investment and insurance choices actually increases as their measured ability decreases, leading to the likelihood of poor outcomes.
In part because of increased confusion as we age, we become more susceptible to sales pitches and pressure put on us by those who target older people with assets. Investment fraud has become epidemic in the U.S., victimizing more than 13 percent of the population each year. Investment fraud victims have been found to be older, richer and better educated, demonstrating the Willie Sutton maxim that crooks always go where the money is. Victims were also most likely to open themselves up to sales pressure by attending the free luncheons or dinners offered with sales seminars.
One in five Americans aged 65 or older has been taken advantage of financially from an inappropriate investment, unreasonably high fees for financial services or outright fraud. In fact, a recently-released study by the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation found that 93 percent of Americans over the age of 65 have been solicited to make a fraudulent investment and an amazing 49 percent actually made the investment with 16 percent having reported that they lost money on it. However, when asked in another study whether they are worried that they will become less able to handle personal finances over time, nearly two-thirds of Americans of Medicare age answered "no." This is the crux of the problem.
Sooner or later, almost definitely by the time we are 70, those of us who make our own financial decisions will find that our ability to do so is weakening. With luck, this will come on gradually and will be so apparent to us that we will take measures to protect ourselves against our own actions, very much as we instinctively hold tighter to handrails as we go down a steep flight of stairs or drive a little more slowly in the dark. Unfortunately, while the average cognitive or intellectual ability of the entire population appears to decline smoothly with age, each of us is unique and may suffer a sudden steep decline as the result of illness, depression or loss of reliable companions. We may also fall under the influence of someone who wants to own our assets.
No matter how smart, experienced or financially knowledgeable we are now, we are likely to be less so in the future. Therefore, we need to make some good, incorruptible plans now for our future, while we still have the ability to do so. And if we have a spouse, life partner or dependent who is less interested in or less knowledgeable about financial matters than we are, it is all the more important that we make decisions that will protect them as well.
The single most important thing we can do is to set up a guaranteed source of lifetime income for ourselves and our loved ones, no matter how long we live. It doesn't mean that we have to turn our assets over to a custodian, which may, in itself, be expensive and fraught with peril.
Most of us will be able to handle our day-to-day finances for much of our remaining lives, paying bills, going on vacations and enjoying life. What we should avoid doing is leaving our core investments, needed to finance our basic standard of living, subject to our own unpredictable future whims or, worse, the future whims of someone else.
Paul Solman and the Making Sen$e team have explored the challenges of older Americans working longer and saving for uncertain retirement in an occasional series on older workers and as part of our online interactive New Adventures for Older Workers.