If you’re in your 60s, you probably don’t do calculations as
quickly as you used to. It might take you a bit long longer to learn the
nuances of a new investment. Yet when researchers test the financial
decision-making capacity of people in this age cohort, they often perform as
well or better than younger people. What they’ve lost in processing power, they
have more than offset in experience.
But eventually with normal aging, say in your late 70s or
80s, financial decision-making tends to worsen. You may overreact to market
downturns, or underreact to financial problems, or forget to pay bills. And
older people are more vulnerable to scams.
Such changes in your brain are predictable and you should
start preparing for them long before they pose problems, financial pros say.
Simplify your affairs, getting rid of unnecessary accounts and credit cards.
Consider annuitizing part of your investment portfolio to create a regular
monthly check. And most importantly, identify someone who can step in when you
need help running your affairs.
Indianapolis advisor Susan Elser says her clients simply
need more help as they age. “The older they get the more assistance they need
in things like tax preparation, what documents do they need for their CPA,
what’s the best way to give to charity,” she says.
Leslie Taylor, a 66-year-old professor of theater arts at
Emory University in Atlanta, had a father who was afflicted with Alzheimer’s
disease toward the end of his life. Now, she takes a battery of mental tests
twice a year as part of an Alzheimer’s study. Taylor continues to perform well
in the test overall but says she struggles in one part where she is supposed to
instantly recall fast moving shapes.
“My reaction time and my ability to process has probably
diminished,” she says.
Taylor adds: “I wouldn’t think of it as an incapacity. It’s
just that your brain changes as your body changes.” Taylor began using a
financial advisor, Margaret Kulyk, several years ago to make sure that she stays
on top of things as she prepares to retire at age 70.
Compounding the problem is that many seniors refuse to
acknowledge deterioration in their mental capacities, research has found.
Michael Finke, a professor of wealth management at the American College of
Financial Services, likens it to older people whose driving skills have eroded
but who won’t give up the keys “All of us have had the experience of driving
with a 90-year-old, and you realize after a few blocks, if you’re sitting in
the passenger seat, you’re sitting in the wrong seat,” Finke says.
Just like driving, seniors should try to belt in their
finances before the road gets bumpy. We’ve talked to academics, medical
experts, and financial advisors to put together a safe course for older
Americans.
Simplify Your Finances
Are your finances a labyrinth that only you can navigate?
Carolyn McClanahan of Jacksonville, Fla., is both a medical doctor and
financial planner. She advises seniors to limit themselves to one bank account,
one brokerage account, one individual retirement account and so on.
“The problem with cognitive decline and dementia is it’s
really complex,” she says. “I’ve seen people do great in their 90s and others
start to have problems in their 50s.”
She goes on. “You should set up your finances just assuming
you’re going to have cognitive decline and dementia. That makes it easier for
someone else to step in.”
McClanahan often advises clients—depending on their
health—to delay taking Social Security as long as possible, even if it means
spending down assets. Some academics recommend that retirees go further and
supplement Social Security with low-cost income annuities to create a more
pension-like stream of income.
Ye Li, an assistant professor of management who researches
decision-making at the University of California, Riverside, recommends that
retirees supplement Social Security with low-cost income annuities to create a
more pension-like stream of income. “Essentially pensions sort of dummy-proofed
retirement savings and now people are stuck with their own bad choices,” he says.
Create a Plan to Fund Retirement
Financial advisors typically create a plan for clients that
analyzes both spending and sources of income.
You can do the same thing on your own.
Don’t just wing it on spending. Look at a couple of years of
bank statements and credit card statements to get an honest assessment of your
burn rate. Leave some wiggle room in your calculation for emergencies like
buying a new car or a major home repair.
Then add up all your sources of income, starting with Social
Security, private pensions, rental properties and finally your investment
portfolio. Delineate how you want that portfolio invested, what percentage in
stocks and bonds, or which mutual funds you’re using.
If you think you’ll need to work to help your retirement
finances, that’s not entirely bad. Working, or anything that brings you in
contact with more people, happens to be good for your brain, researchers say.
Identify Someone Who Can Step In
Many people select their spouses as their emergency
surrogate, but at least one of your backups should be substantially younger
than you are. That person should get a copy of your financial plan so he or she
can see the big picture. If you have a financial advisor, your backup should
try to sit on some of your meetings.
Rob Lyman, a Los Altos, Calif., financial advisor, says when
he discusses estate planning with clients in their 50s or older, he asks them
to sign a confidentiality release that allows Lyman to alert a designated
person if he sees signs that a client is slipping mentally. Lyman hasn’t had to
step in, but anticipates he will in the future.
“You can’t write a formula,” he says. “Everybody degrades in
a different way. You have to be very sensitive to how the person was formerly.”
Things can get dicey if retirees don’t identify a backup
person. Chicago financial advisor Cicily Maton years ago had a client who
suddenly started showing signs of mental decline, including once forgetting
what street she lived on.
Maton pondered what to do. The client had always been
independent, and hadn’t picked a surrogate.
Maton asked the client for permission to mail out a detailed
summary of her personal finances to the client’s six children scattered around
the country. “I didn’t have permission to tell them she was declining,” Maton
says. “I had permission only to send them information. “But they got the
message and came back and helped their mother.”
Don’t Forget Your Heirs
McClanahan, the Jacksonville advisor, was called in to help
a man in his 90s who had amassed a $6 million fortune by buying stocks and
holding them forever. But he had lost track of his investments, and his
children would have had a hard time sorting everything out after he died.
Even worse, his estate plan made no sense. He was leaving
stocks in his brokerage account to charity and his tax-deferred savings
accounts to his children. This was backward. His children could inherit the
stocks in his brokerage account tax-free. But they would have to pay hundreds
of thousands of dollars in taxes if they inherited a tax-deferred account.
McClanahan had the man change his beneficiaries so that his
tax-deferred account went to charity and change his will and trust so that his
brokerage account went to the children.
“It would have been a nightmare,” she says. “We cleaned all
that up.”
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