The Biggest Financial Risk for Boomers - Cognitive Decline
A few years ago, I wrote about the dilemma of money and dementia. The boomers had not moved into the older years of old age just yet. Most of them who heard my message were taking care of their parents and didn’t consider that they would be a high- risk group in the near future. However, the future is here! Boomers are now between the ages of 57 – 75. In the next 10 years, nearly half of the oldest boomers face the likelihood of some cognitive impairment. The rates for mild cognitive impairment and dementia rise from a combined 12% for ages 70 – 74 to 45% for those 80 – 84, according to a 2017 report by the Center for Retirement Research at Boston College. Even a mild decline “can erode financial capacity,” the center said.
Big Money at Stake
Boomers own more than half the estimated $50 trillion in total U.S. household financial assets. Of that $26 trillion, roughly a quarter, or $6.5 trillion, is invested on a do-it-yourself basis. A big majority of that DIY total resides at Vanguard, Fidelity, and Schwab.
The challenging math of asset allocation and withdrawal rates from 401(k)s and individual retirement accounts creates “an enormous problem that we are only vaguely aware of,” says David Laibson, an economics professor at Harvard University who co-wrote a study that found financial skills peak at age 53. Without mechanisms in place to delegate such decisions, investors with cognitive decline may “hold on to the reins even more tightly and steer the horse over the cliff.”
Boomers who are calling the shots without help from wealth advisors, are more vulnerable to making bad investment decisions. Unaware of the risks aging brains impose on good financial decision-making, boomers may veer from some “set it and forget it” stock and bond allocation into risky margin debt. Or it may be that they have a stack of unpaid bills that they lose track of, and somebody has to intervene to sort things out. Or it may be that their finances are a chaotic mess. Meredith Stoddard, Fidelity’s vice president of life events planning, says she knew of one investor who died holding “56 accounts at different firms.”
Financial groups around the country are aware of these risks and have taken some steps to protect their clients and also protect themselves. Unfortunately, there’s no one size fits all solution to deal with cognitive decline. People’s family situations and estate size and complexity vary. Some people may distrust their own children, complicating a power of attorney designation.
Since February 2018, brokerage firms have been required to ask customers to designate a ‘trusted contact’ who can be notified of possible problems. But a survey that was released last October indicated that less than 25% of firms’ clients have provided a name. Another rule that was instituted gives firms greater power to step in and temporarily halt disbursements when fraud is suspected.
The Dark Cloud
Baby boomers themselves have some responsibility to take steps to prepare for a possible future with cognitive decline. A 2014 survey co-sponsored by Merrill Lynch unit of Bank America found that fears about dementia outweighed all other possible illnesses combined. Fear can’t win in this scenario. Developing a plan for the future is a necessity. One key element of a plan is identifying a person or service provider who can help manage one’s financial affairs, preferably under the kind of legal authority embodied in a power-of-attorney or trust. Another idea is collecting for that person – either in a binder or an internet vault – a list of goals and all of the relevant financial account numbers and passwords, as well as regular monthly bills and important records.
In the event that you notice that financial skills are declining in yourself or a loved one – get a cognitive assessment and find out what you are dealing with. Preplanning will make the transition go a whole lot smoother. Denial of cognitive decline puts you at risk of financial scams and exploitation. Not acknowledging this situation only results in bigger losses and greater heartache.
Smith, R. (June 6, 2021). Baby boomers’ biggest financial risk: cognitive decline. Retrieved from https://www.wsj.com/articles/baby-boomers-financial-risk-cognitive-decline-11622942343