Declining Cognitive Ability Presents Challenges to Boomer Finances
As Baby Boomers age, policy makers and economists may be served by looking at the condition of not just their nest eggs, but the health of their brains.
So says economist David Laibson, of Harvard University in a speech called “The Age of Reason.” Prof. Laibson spoke at Morningstar’s annual conference in Chicago before hundreds of financial advisers and asset managers — industries grappling with the inevitable shift of assets from workers accumulating money to those trying to live on it as they grow older.
Fluid intelligence — that is intelligence displayed in things like memory tests — decreases dramatically with age. In fact, “it’s all downhill from age 20” Prof. Laibson said. “What about the 80-year-olds? It’s the 80-years-olds who have the million dollar IRAs. Not the 20-year-olds.”
But clearly, there’s a lot more to life than fluid intelligence. Crystallized intelligence — memory, wisdom and so on — does increase over time, but less so, on average, in senior years.
All told, the point at which we make the best financial choices is 53 years old, according to his data. “Of course there are exceptions,” Prof. Laibson said.
Many seniors end up in a state called cognitive impairment without dementia that isn’t quite dementia, but still (as the name implies) a deterioration of memory. In spite of this, people still may make financial decisions on their own. Prof. Labison estimated that 16% of those 71-79 years old, 29.2% of 80-89 year olds, some 38.8% of those over 90 years old are in such a state. ...
Those people are at great risk for financial abuse. ...
Those over the age of 50 end up paying higher interest rates, even though on average they had better FICO scores and lower default rates, Prof. Laibson said. “Middle aged people get better deals,” he said. In terms of risk-adjusted returns on investments, the young do relatively well, but the “old are doing absolutely abysmal,” paying more in fees and suffering from poor asset allocation, he said.
Prof. Laibson called for keeping things simple for clients, while still giving them a sense of control. He called on policy makers to expand a fiduciary duty for financial advisers and expand regulations requiring power of attorney for the elderly.
That overoptimism about mental muscle keeps people from asking for help. “We procrastinate. We don’t like complexity… We have bad memory and we don’t know the extent of our bad memory,” he said.
Personally, the last really good financial decision I can recall making was when I was 22 in 1981 and put a few thousand dollars in a 30-month certificate of deposit that paid 16.5% interest. It's been all downhill since.
Retired people with a lot of time on their hands might, however, be better at noticing and complaining when companies add small fees to monthly charges, which seems to be the main road to riches these days. For example, my wife and I spent countless hours figuring out which cell phone plan to get for the family and finally came up with a pretty good deal. But, after a couple of months, the monthly bill went up $6 per month.
Why? I don't know, because computers and bandwidth are getting more expensive I guess. I could probably dig into and find out and get it changed, but it was such an ordeal in the first place to figure out the plans that I don't have the energy to look into it.
As you get older, it gets more difficult to refocus your attention. The fixed cost investment of concentrating upon a task full of complex and arbitrary details goes up. It's like swinging the oil tanker around -- it's just easier to keep going and let the phone company grab an extra $6 per month.