Connecting Financial Literacy to Cognitive Health and Alzheimer's
Two studies show why keeping up with money matters really matters
Having trouble managing your finances, research has shown, can be an early sign of cognitive difficulty and even dementia. But two fascinating recent studies suggest how important it can be to your mental health and your wallet to keep up your financial literacy and your confidence about it as you get older.
The important takeaway from these studies is that declining financial literacy is not just about financial decision making. "It has the potential to have more of a far-reaching impact," said Gary Mottola, research director of the FINRA Investor Education Foundation and a co-author of the studies. (FINRA is the self-regulatory organization for brokers.)
"It's not just what you know but how you feel about what you know."
Mottola and Rush University Medical Center professors Lei Yu and Patricia Boyle reviewed data from roughly 1,000 people (average age: about 80) in the Rush Memory and Aging Project. The racially- and wealth-diverse participants — mostly women — lived in retirement communities, subsidized housing facilities, churches and social service agencies in the Chicago metropolitan area.
Let me tell you about each of the studies and what we and our parents can learn from them about managing money later in life.
The Impacts of Declining Financial Literacy
For "Adverse Impacts of Declining Financial and Health Literacy in Old Age," the researchers looked at the participants' annual financial and health literacy assessments for up to 10 years. Although those literacy levels declined in general over time, "a small proportion of participants" (17%) were able to maintain their literacy level.
Those with a faster decline in financial and health literacy were more susceptible to scams and poorer decision making, however.
The researchers' conclusion: "Efforts to mitigate declining financial and health literacy may promote independence and well-being in old age."
Said Mottola: "Declining financial health literacy predicts several aspects to a person's life: decision making, well-being, scam susceptibility and cognitive health."
The Importance of Being Confident About Money
In "Confidence in Financial Literacy and Cognitive Health in Older Persons," the authors discovered that it's not just how much you know about managing money, it's how confident you feel about that. The study's participants were free of dementia at their first literacy assessment and were followed annually.
During the follow-ups, 18% of people developed Alzheimer's dementia. Financial confidence (as well as literacy) was associated with a lower risk of Alzheimer's. While 78% of participants rated their confidence in financial literacy comparable to what the researchers predicted based on their actual knowledge, 9% were overconfident and 13% were underconfident. The underconfident ones had a higher risk of developing Alzheimer's and faster cognitive decline.
Noted Boyle: "It's not just what you know but how you feel about what you know."
Staving off dementia, if possible, can be a huge help to your financial security and the financial security of your loved ones.
The Financial Impact of Cognitive Decline
As the RBC Wealth Management-U.S. report "Preparing for the expected: The financial impact of cognitive decline" put it: A dementia-related diagnosis can be financially devastating — often exceeding $750,000.
"Not only is there a significant financial impact to the person affected by the disease," the report said, "but on their caregivers as well. Yet few families factor this impact into their wealth plans."
RBC Wealth Management-U.S. and Aon surveyed 1,000 current and former non-professional caregivers of people experiencing cognitive decline or dementia. It found that 80% of caregivers reported some level of financial mismanagement by the individual they cared for. And those costs generally increase with each stage of cognitive decline, the RBC researchers wrote.
"We're trying to bring awareness that cognitive decline is something to plan for," said Angie O'Leary, head of wealth planning at RBC Wealth Management-U.S., who is based in Minneapolis. "We now have a group in our organization whose sole job is to help advisers with clients who are potentially at risk."
"Literacy is a skill we know can be increased across the lifespan."
For O'Leary, this subject is personal. A few years ago, she noticed that her father-in-law's financial bills and statements were scattered around the house. "There were envelopes with checks in them that weren't sent. Some with stamps, and some without," said O'Leary. "That was the first sign something was not right."
It took a year to get all her father-in-law's finances sorted out, O'Leary noted. He died of dementia-related complications.
Mottola offered this advice: "Declining financial literacy could be a harbinger of financial outcomes. So, monitoring it could be a way of noting potential problems."
It would also help, he added, if older adults received — and continued to receive — financial education as they age.
How to Keep Up Your Financial Literacy and Confidence
"Literacy is a skill we know can be increased across the lifespan," noted Boyle. So, she said: "People should continuously try to increase their own knowledge. Things change in the financial world and you need to keep pace with them."
That can mean reading financial publications, books and articles on websites or sharing those with your parents. Websites from the Securities and Exchange Commission and FINRA also have free, useful articles to up your financial literacy.
If you invest through mutual funds, exchange-traded funds or an employer's 401(k) retirement plan, read the materials you receive about the investment choices and the decisions made by the investment managers.
It's vitally important.
Only 28% of respondents to a November 2020 global Allianz financial and risk literacy survey answered all four questions correctly. "Individuals with a higher level of financial literacy are better equipped to navigate economic uncertainty," the Allianz survey report said.
And the new Schroder's Global Investor Study 2020 surveying 23,000 investors found that 38% didn't understand the options available to them with their retirement savings.
The more knowledgeable you and your parents are about money matters, the greater the chance of being confident about financial literacy. "Everybody has the potential to increase their confidence," said Boyle.
And if your parents use a financial adviser, said Mottola, ask them to list you as a "trusted contact" on their account so you will be contacted if the money pro notices cognitive issues.