Protect your retirement savings against the risk of cognitive decline.
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Many pre-retirees and retirees appropriately worry about market risk (stock market crashes) and longevity risk (outliving your money). Cognitive decline is another serious risk that retirees need to address because it directly affects your finances. So, when you’re developing strategies to build lifetime retirement income and protect against market and longevity risks, you’ll also want to take into consideration the risk of cognitive decline in your later years.
What’s The Financial Risk Of Cognitive Decline?
According to a recent study by the Life Insurance Marketing and Research Association (LIMRA), about 14% of U.S. adults over age 65 suffer from dementia, and another 15% have mild cognitive impairment (MCI). This latter condition involves measurable decline beyond normal aging but not enough to meet the clinical threshold for dementia.
Taken together, these numbers suggest that nearly 30% of adults over age 65 have some form of diminished ability to make financial decisions. And this risk rises as people age into their late 70s and 80s. This makes older retirees more vulnerable to financial losses due to making mistakes, being a victim of financial fraud, or being exploited by unscrupulous financial predators.
Here are a few examples of financial vulnerability that I’ve seen first-hand with older relatives and friends. One problem is reduced patience when dealing with financial complexities, so people take shortcuts or don’t pay attention to the fine print. Another situation involves forgetting to pay important bills, make significant tax payments, or withdraw required minimum distributions from IRAs and 401k plans. Yet another problem is that retirees are more likely than younger people to get excited by marketing offers for misleading or fraudulent products, even though they might express doubts about the credibility of those products. These examples are all confirmed by the LIMRA study.
The LIMRA study cites a few daunting statistics that indicate the financial loss problems are widespread and persistent. According to the study, older Americans lose $36.5 billion annually to financial exploitation, and roughly 37% of older adults experienced some form of financial exploitation over the course of a five-year period.
“Retirement planning has traditionally focused on the risks associated with financial markets and products,” said Chris Heye, Ph.D., a fellow at the LIMRA Retirement Income Institute and author of the study. “But as people live longer, success in retirement depends just as much on sound decision‑making over time. Cognitive decline introduces a form of ‘decision risk’ that can undermine even the most well‑constructed financial plan.”
What Can Pre-Retirees And Retirees Do To Protect Their Finances Against Cognitive Decline?
One overall strategy to address the risk of cognitive decline is to reduce the number of significant financial decisions you need to make in your later years. When you think about it, many significant financial transactions create an opportunity for mistakes, impulsive purchases, or exploitation. Examples include buying or selling an asset or a house, choosing a financial product, or paying large bills such as taxes or insurance premiums. To address this risk, simplify your financial accounts and put significant payments and income on autopilot. Let’s look at a few practical examples that implement this general strategy.
Maximizing your monthly Social Security benefits through a careful delay strategy is a common recommendation for pre-retirees to help address market and longevity risks. This strategy also addresses cognitive risk, since your monthly check is automatically deposited in your bank account each month. Similarly, if you participate in a traditional pension plan at work, maximizing your monthly check by waiting to start benefits until early retirement reductions are no longer an issue can simultaneously address market, longevity, and cognitive risks.
Similarly, buying an income annuity from an insurance company can simultaneously address market, longevity, and cognitive risks. These annuities can be beneficial for people who don’t participate in traditional pension plans at work because they provide a lifetime monthly income much like a pension does. Annuities can be complex, so be sure to do your shopping while you still have your wits or work with a financial professional.
There’s More You Can Do
My wife and I watched our parents decline in their later years, and many older readers may have had the same experience. Living through this experience can help you think ahead to your own later years and take steps to protect yourself. These steps include taking inventory of your assets and expenses, finding a financial advocate to help manage your finances when you need it, giving them legal authority to act on your behalf through a power of attorney, and identifying the future triggers that might indicate it’s time to implement your plan.
This might sound like a lot of work, so a helpful resource that lays out the steps for you is the Thinking Ahead Roadmap: A Guide For Keeping Your Money Safe As You Age. Development of this resource was funded by AARP and the Society of Actuaries, and it’s hosted online by the University of Minnesota.
The LIMRA study discusses one more serious disconnect regarding financial risks: Self-confidence in financial decision-making often doesn’t decline with age, even if people might be experiencing some form of cognitive decline. So, don’t think it won’t happen to you. Instead, remember that it’s never too late to take action steps to protect your retirement.
