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How Aging Impacts Our Financial Decisions

Ways to protect your parents — and yourself — against potential money woes sparked by mental decline

By Richard Eisenberg

You might not know it, but financial capacity — the ability to manage your money to meet your needs and match your values — is one of the first things to go when you have mild cognitive impairment.
That’s the condition of people who have mild problems with thinking and memory. Mild cognitive impairment can be an early sign of Alzheimer’s disease and affects about 5.4 million Americans; 22 percent of people 71 and older have it.
A recent seminar I attended, “The Impact of Aging on Financial Decisions,” provided fascinating news and advice about the nexus of financial capacity and mild cognitive impairment. It was part of a personal finance conference staged by the National Endowment for Financial Education (a nonprofit foundation that’s a Next Avenue partner) and the Society of American Business Editors and Writers.
America’s ‘Financial Capacity’ Problem
If you have elderly parents or want to prepare yourself for the chance that you may face serious cognitive decline issues someday, you’ll want to know what I heard.
Daniel C. Marson, director of the Alzheimer’s Disease Center at the University of Alabama, and Charles Sabatino, director of the American Bar Association’s Commission on Law and Aging, recently wrote: “There is a tremendous and underappreciated ‘financial capacity’ problem posed by our rapidly growing older adult population.”
(MORE: How to Manage Your Parents’ Money When They Can’t)
The Good and Bad News
Eric Johnson, director of the Center for Decision Sciences at Columbia University’s business school, told the seminar’s audience that he had bad news and good news. His bad news: everyone loses what’s known as fluid intelligence as they age — that’s the ability to learn and process information quickly.
His good news: The other type of intelligence, known as crystallized intelligence — think of it as your knowledge of the world — grows until you’re around 65. “It’s why people are better at doing the New York Times crossword puzzle in their 60s than in their 20s,” said Johnson.
Consequently, he said, cognitive collapse is compensated by an increase in crystallized intelligence.
(MORE: Mild Cognitive Impairment: Forgetfulness As You Age)
That's been proven by a new study from the School of Business Administration at University of California, Riverside. After comparing economic decision-making traits of 336 people (about half in their late teens and 20s and half in their 60s, 70s and early 80s), the researchers found that older participants performed as well or better than the younger ones. “The findings confirm our hypothesis that experience and acquired knowledge from a lifetime of decision-making offset the declining ability to learn new information,” said assistant professor of management Ye Li in a Medical News Today article.
That’s comforting.
When Financial Decisions Grow Harder
But this was disturbing: Johnson told the audience bluntly that “after 60, it’s harder to make good financial decisions” because we lose our fluid intelligence over time.
Financial literacy declines in later life and investment skills deteriorate sharply around age 70.
More troubling: Annamaria Lusardi, an economics professor at George Washington University’s School of Business, surveyed older people and found that although they scored low on questions about financial literacy, they gave themselves high rankings.
So, not only do older Americans have trouble making wise money decisions, they don’t realize when they’re making bad choices, which can make them easy prey for con artists and unscrupulous financial firms.
That’s one reason why older victims of financial fraud lose $2.9 billion annually, according to a 2011 MetLife analysis, and why elderly people pay some of the highest costs for debt. In one study, 75-year-olds shelled out about $265 more annually than 50-year-olds for home equity lines of credit.
The Form That Can Help

Holly Deni, a financial gerontologist who runs ElderLife, an eldercare advisory service based in Little Falls, N.J., made a convincing case at the seminar for why anyone with elderly parents or relatives needs to take precautionary measures to help their loved ones avoid financial tragedies. She spoke from experience.
In 2006, Deni became the court-appointed guardian for her 99-year-old aunt Carolyn, a formerly fashionable Manhattanite struggling with cognitive decline whose life had sadly spiraled. None of Carolyn’s relatives had power of attorney, the legal document that would have let them manage her finances due to her incapacity.
(MORE: Why Older Minds Make Better Decisions)
Deni said it cost $15,000 to have the guardianship papers drawn up compared to the $300 to $600 it would have cost for power of attorney. “It’s ironic that my aunt spent money to create a will, but did nothing to protect herself while she was alive,” she told us. 
Her advice: Get a power of attorney drawn up for your parents, elderly single relatives and — perhaps most importantly — yourself. “Anyone who doesn’t have a power of attorney should get one because any of us can fall into incapacity at any time,” said Deni.
Helping Your Parents Gradually
She also suggested that if you notice your parents beginning to have trouble managing their money, assist them incrementally. “Start by setting up a bill-payment schedule and automatic bill paying. Then, become a co-signer for one of their small financial accounts,” she advised. “Then, find out where there important financial papers are.”
Dr. Carolyn McClanahan, a physician and director of financial planning at the Life Planning Partners firm in Jacksonville, Fla., said helping your parents consolidate their accounts can prevent them from becoming victims of financial fraud. “Consolidate as much as possible," she said, "because the more accounts that are floating out there, the easier it is for someone to get their fingers on one.”
The Person You Need to Know
One more tip I heard to protect your parents with financial capacity challenges: Meet with someone who works at your parent’s bank.
“If your loved one frequents one bank, they get to be known there,” said Deni. The bank employee can then let you know if he or she has noticed anything of concern — a pattern of unusually large withdrawals, for instance.
When I take my dad to his bank occasionally, I always get a personal greeting from an employee who assisted us with assorted financial matters after my mom died last year and helped with the power of attorney documents for my father.
I think of it as our subtle signal to each other that we’re both looking out for my dad.

Photograph of Richard Eisenberg
Richard Eisenberg is the former Senior Web Editor of the Money & Security and Work & Purpose channels of Next Avenue and former Managing Editor for the site. He is the author of "How to Avoid a Mid-Life Financial Crisis" and has been a personal finance editor at Money, Yahoo, Good Housekeeping, and CBS MoneyWatch. Read More
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