Most Americans tend not to worry about their ability to manage their money as they age. But they should.
A new study reveals the ages at which aging Americans lose their ability to pay bills, handle debt, maintain good credit, assess an investment’s potential return relative to its risk, and detect fraud.
The good news first: Most people who don’t suffer from cognitive impairment can continue managing their money in their 70s and 80s, according to a report just published by the Center for Retirement Research at Boston College (CRR). But of course some older Americans, and especially financial novices who take over money management after the death of a spouse, will need help, researchers at the CRR found.
The authors of the report concluded that “most people with a cognitive impairment will need help managing their money to prevent fraud or abuse and providing this assistance effectively will require overcoming several obstacles.”
Those are the topline findings. There is, however, much more to be learned from the report, Cognitive Aging and the Capacity to Manage Money, which was written by Anek Belbase, a research fellow at the CRR, and Geoffrey Sanzenbacher, a research economist at the CRR.
Should you or a loved one take a ‘financial capability’ test?
Let’s start with the basics. According to the authors, “financial capacity is the ability to manage financial affairs in one’s own best interest, and involves a range of activities – from carrying out procedures, such as bill paying, to exercising judgment, such as assessing an investment’s potential return relative to its risk.”
Types of abilities measured by tests of financial capacity
Type of ability Example of tasks Basic money skills Identify and understand relative value of bills and coins Cash transactions Assess cost of an item and understand sales receipt Checkbook management Know when/how to use a check Bill payment Understand how to read, pay and dispute bills Bank statement management Find deposits, withdrawals, and balances in bank statement Asset and estate management Identify assets and income Knowledge of financial concepts Understand concepts like debt, insurance, and asset returns Financial judgment Assess what an asset is worth, detect fraud and other risks Source: Adapted from Marson et al. (2009)
Now researchers use two main types of tests to assess financial capacity, according to Belbase and Sanzenbacher: 1. performance-based assessments of common tasks — such as reading an electric bill and writing and sending in the check; and 2. clinical assessments, which include both an interview and cognitive tests to assess an individual’s capacity to make sound decisions.
And it might be well worth having your financial capacity tested at some or various points in your life. “Both types of tests are typically performed in-person, require 30 to 60 minutes, and can gauge whether a person is capable of managing his finances independently, needs help on some tasks, or is incapable of controlling his finances,” the researchers wrote.
Belbase noted in an email that people normally get evaluated by psychologists or psychiatrists — as part of disease management or Alzheimer’s care, but sometimes people get evaluated for legal reasons. Government systems that pay benefits also have a process for assessing capacity as well. For example, the Social Security Administration and the Department of Veterans Affairs have their own capacity assessment procedures. This report, Informing Social Security’s Process for Financial Capability Determination, provides a summary — and a lot of detail as well — on different types of capacity assessment tools, wrote Belbase.
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Before you go (or send a loved one) for a financial capacity test, it might be worth becoming a bit more familiar with financial capacity. According to the authors, “financial capacity relies on two key abilities: 1) performing financial tasks, which mostly requires crystallized intelligence, or knowledge; and 2) making financial judgments, which requires a mix of knowledge and fluid intelligence like memory, attention, and information processing.”
Now, here’s where things get a bit interesting. “Knowledge remains largely intact into one’s 70s and 80s for those experiencing normal cognitive aging, but fluid ability, the capacity to process new information, starts to decline as early as one’s 30s,” the authors wrote. “This pattern means that individuals experiencing normal aging are more likely to develop deficits in their financial judgment than in their ability to carry out financial tasks.”
Tips for aging Americans
Belbase has these recommendations for all aging Americans — not just those with cognitive impairment:
1. Spend the time to make a spending plan when you retire, which will include where to draw money from, how to invest, whether to downsize or use home equity, and what might be left over for the kids.
2. Involve the kids and any other people that you seek financial advice when you make the plan.
3. Once you have a plan, document it and share it with your family and trusted advisers who may help you later on.
4. After age 75, make sure both members of a couple and a trusted adviser, which may be a family member, know about the plan and have access to the account you use to buy things, to monitor for fraud.
5. Before age 75, agree on a process for transferring responsibility for managing money in case a member of the couple dies or becomes disabled, and make sure both members of a couple know how to run the household’s finances.
So, if you’re just aging normally, with no signs of cognitive impairment, there’s little reason to worry about your ability to manage your personal finances. That’s the good news.
“Retirees in their 70s and 80s are often just as able to pay the bills, handle debt, and maintain good credit as workers in their 50s and 60s,” the authors note.
The bad news is if you’ve never managed money — paid the monthly bills, balanced the checkbook, reviewed your investment accounts, you might be vulnerable. “These financial novices are typically individuals who take over the responsibility of managing their household’s finances after a spouse dies or becomes incapacitated,” the authors wrote.
And in the absence of some sort of support, these financial novices – predominantly widows – could make mistakes, “with consequences ranging in severity from lower credit scores to prematurely running out of money,” the authors wrote. They’re also vulnerable to financial fraud, which is typically a one-time event perpetuated by a stranger, and the victim often is unaware of the fraud until it is too late, or financial abuse, which is usually where someone close to the victim uses the victim’s resources for their own gain. The victim is typically aware of the abuse, but unable or unwilling to stop it.
The news is even less good for those with cognitive impairment, which according to the Centers for Disease Control and Prevention (CDC) is when a person has trouble remembering, learning new things, concentrating, or making decisions that affect their everyday life.
Cognitive impairment exists, the authors noted, on a continuum from mild cognitive impairment (MCI), which according to the Mayo Clinic is an intermediate stage between the expected cognitive decline of normal aging and the more-serious decline of dementia, to severe dementia, Alzheimer’s disease for instance. More than 16 million people in the U.S. are living with cognitive impairment, and age is the greatest risk factor for this condition, according to the CDC.
“Many financial planners that work with retirees appear to do number one, but I’ve only come across one or two companies that involve the kid and actively monitor for fraud,” said Belbase. “It seems rare to have a plan for dealing with dementia or death of one member of a couple — from the standpoint of managing finances — as well.”
What’s especially troubling is that most people with a cognitive impairment, an estimated 16 million people today, will need help managing their money to prevent fraud or abuse and providing this assistance effectively will require overcoming several obstacles, the authors of the report concluded.
“The combination of high self-confidence, intact knowledge of financial procedures, and impaired financial judgment makes people with MCI more likely to be victims of fraud,” the authors wrote. “For people with moderate to severe dementia, their vulnerability is clearer because they are usually unable to carry out financial transactions. Thus, many of these individuals rely on a caregiver, which creates a different type of risk — that of financial abuse by the caregiver rather than financial fraud.”