Journal of Financial Planning: April 2017
For an aging population, cognitive decline is an unnerving challenge on numerous levels. Expected longevity has jumped more than 10 percent since 2000, according to the Society of Actuaries. The average 65-year-old man can be expected to live into his mid-80s, one-fourth live past age 90, and 10 percent live past 95. The average 65-year-old-woman has an even longer life expectancy. Affluent individuals have actuarial life expectancies beyond the averages and often have complex financial considerations requiring high levels of cognitive function. Although increased life spans bring great benefits, the potential for cognitive decline is an important consideration for financial advisers.
Defining Cognitive Decline
Dementia is defined as the loss of cognitive and mental functions severe enough to impair a person’s daily functioning, and estimates indicate that nearly 15 percent of Americans over age 70 suffer from some form of dementia.1 An estimated 5 percent of the population of those ages 71 to 79 suffer from dementia, increasing to 39 percent for those age 90 and older.2
According to the Mayo Clinic, mild cognitive impairment (MCI) is an intermediate stage between the expected cognitive decline of normal aging and the more serious decline of dementia. Mild cognitive impairment can involve problems with memory, language, thinking, and judgment that are greater than normal age-related changes.
Individuals with mild cognitive impairment may be aware that memory or mental function has “slipped.” Family and close friends also may notice changes, but they often aren’t severe enough to interfere with day-to-day life and activities.
In total, about half of 80-year-olds suffer from dementia or cognitive impairment that falls short of dementia. This group includes dementia patients, but is also largely comprised of those struggling with cognitive decline—impairment in processing speed, reasoning skills, spatial processing, and the ability to solve problems spontaneously.
Implications
Studies of decision-making have identified tendencies of older consumers to make poor financial choices when compared to middle-aged consumers, highlighting potential risks for an aging population.
One study found that financial literacy scores declined by about 1 percent per year after age 60 while other studies identified declines in investment skill and credit behavior (see the Center for Retirement Research at Boston College paper in endnote 2).
The Rush University Memory and Aging Project, for example, continually assesses cognition among a group of individuals in the Chicago metropolitan area. The annual assessment identifies the impact of cognitive decline on financial literacy, confidence in the ability to manage money, and willingness to seek help in managing finances.
According to one study that explored this data (see the Journal of Human Capital paper in endnote 1), at the time of the initial assessment, individuals were able to answer most financial literacy questions correctly, were reasonably self-confident, and were primarily responsible for managing their own finances (though a meaningful percentage received some help with their finances).
Declines in cognition among study participants led to declining financial literacy scores, but despite the decline in general levels of self-confidence, confidence in managing finances remained high. The “stickiness” of confidence in managing financial matters may indicate that older individuals fail to recognize the impact of declining cognition on their financial decision-making ability. Although older individuals were reluctant to give up control, the research published in the Journal of Human Capital also indicated that those with declining cognition were willing to seek some degree of help from others.
Data from the Health and Retirement Study, a nationally representative study of Americans over age 50 and their spouses, has been used to draw similar conclusions. In examining patterns over a 27-point cognition scale, research has identified that cognitively impaired individuals were either unaware of their situation or were unwilling to admit their impairment.3
Aging clients face a wide variety of financial considerations—the decline of defined benefit plans creates retirement planning complexity; rising costs of medical care alongside shrinking insurance coverage creates financial and emotional stress; and the complexity of the tax code presents a unique set of challenges. Cognitive decline reduces the likelihood that clients will make appropriate decisions unless they plan in advance. The time to start planning is before the onset of cognitive decline.
Some Solutions
Cognitive decline can jeopardize hard-earned financial security at a time in which clear-headed decision-making may be most important. The choices that must be made to manage finances and investments are contingent upon one’s understanding of accounts, tax rates, global equity and fixed-income markets, and short- and long-term cash flow needs. When this understanding falters, risk increases.
There is no one, widely used measurement system for cognitive decline, which complicates the task of identifying whether an individual is impaired enough to need help. Family members and financial advisers should look for changes in demeanor, behavior, or personality to identify potential indications of cognitive decline. People who are typically on top of everything may become scattered or disorganized, or may start to forget recent conversations or correspondence. Documenting changes can confirm a pattern of behavioral change and will help support what may be a difficult conversation.
Understanding the realities of aging helps families better prepare, especially when financial and personal legacies are at stake. Certainly not all families encounter this issue and some are reluctant to discuss cognitive issues, but the future can be better managed by those willing to share information and responsibilities with trusted family members and advisers. Protecting against cognitive decline can involve establishing trusts, assigning power of attorney to other family members, or transitioning responsibilities to professional third parties.
Communication within the Family
The way in which families interact changes as life progresses, especially for those who are caring for their children and their parents at the same time. Both this sandwich generation and the elder generation are considering issues such as investment decisions, maintenance of family-held property, and health care needs that expand in tandem with extended life spans.
The idea of sharing information is greeted differently from family to family, as dynamics among parents and siblings can create long-term financial and emotional complications. Some families limit financial transparency to bill payment and basic budgets while others are fully transparent about their finances.
In an ideal world, financial goals, personal preferences, and estate plans are prepared and shared with family members and advisers long before cognitive decline impairs financial decision-making.
Living wills and medical directives can provide guidance as to how to handle certain medical situations.
A durable power of attorney for health care appoints a person to make health care decisions, and can be structured to become effective only upon incapacity. A durable power of attorney for property can provide continuity of decision-making for business and/or personal affairs.
Other considerations best handled before the onset of cognitive decline include gifting strategies, trusts, and insurance planning. The transition process within the family calls for formal documentation and introductions to advisers. Meeting in person with trustees, financial advisers, accountants, and attorneys will promote a less difficult transition.
Planning with Confidence and Foresight
The tendency of families to wait until decline has started can create financial and emotional challenges. The delicate nature of cognitive decline underscores that a family’s true financial situation goes beyond portfolio performance. Families should have a plan that captures their life goals, not just their financial outlook.
A comprehensive checklist of financial and legal items is one of the most critical tools with which families can equip themselves. Working with various advisers, including financial planners, CPAs, and attorneys, families should identify the location of legal documents, all financial accounts, and the necessary passwords to access critical information. These details should be accessible to appointed family members and held in a secure environment. It is also important to document personal preferences regarding considerations that may fall outside the specified direction provided in a will or trust document.
The best aid for handling cognitive decline is knowledge. Families will benefit by improving their personal financial literacy so that they can recognize warning signs and change direction when concerns arise.
If families are comfortable communicating with one another, have a grasp on their own capabilities, and delegate when necessary, they can put themselves in a strong position. Their efforts will allow them to direct less energy to anxiety about their financial pressures and more to the emotional needs across the generations.
Renée Kwok, CFP®, is president and CEO of TFC Financial Management, overseeing the firm’s financial planning and wealth management services.
Daniel Kern, CFA, CFP®, is chief investment officer of TFC Financial Management, where he is responsible for overseeing TFC’s investment process, research activities, and portfolio strategy.
Endnotes
- See “Dementia Risk and Financial Decision Making by Older Households: The Impact of Information,” by Joanne W. Hsu and Robert Willis published in the April 2013 issue of the Journal of Human Capital, available at ncbi.nlm.nih.gov/pmc/articles/PMC4267321.
- See “What Is the Age of Reason?” by Sumit Agarwal, John C. Driscoll, Xavier Gabaix, and David Laibson, published July 2010 by the Center for Retirement Research at Boston College, available at crr.bc.edu/wp-content/uploads/2010/07/IB_10-12-508.pdf.
- See “Growing Older in America: The Health and Retirement Study” posted July 15, 2015 by the National Institute on Aging, available at nia.nih.gov/health/publication/growing-older-america-health-and-retirement-study, and Hsu and Willis (2013) shown in endnote 1.
Resources
In addition to those mentioned in the endnotes, the authors used the following resources as background information for writing this article:
• “How Does Aging Affect Financial Decision Making?” by Keith Jacks Gamble, Patricia A. Boyle, Lei Yu, and David A. Bennett, published January 2015 by the Center for Retirement Research at Boston College, available at crr.bc.edu/briefs/how-does-aging-affect-financial-decision-making.
• “How to Make Your Money Last as Long as You Do,” by Mark Miller, published February 18, 2017 by The New York Times, available at nytimes.com/2017/02/18/your-money/retiring-longevity-planning-social-security.html.