Are you losing it and don’t know it? Is the decline in financial literacy happening to you?
All stages of life have many happy moments and some not so happy as well. Growing older bring many changes and challenges to our lives. What do we do? We should acknowledge that change occurs and take the necessary steps to make the change a little bit easier. Those steps typically include planning and preparing for the change; thinking through what could go wrong, and what are the positive aspects of the change; and finding resources to help us through the change.
However, what if you don’t see the change coming?
Effects of Aging Begin Earlier Than You Think
As we age we may shrink, our heart rate may slow, we may have vision or hearing loss, we may lose muscle mass and function and we may lose our ability to make sound financial decisions.
Aging does not only happen when you reach 50 or 60. The effects of aging are visible at much younger ages as well. Somewhere in our 30’s we start to lose muscle mass and function. We start shrinking around age 30 and it is estimated that between age 30 and 70 men lose approximately 1 inch and woman lose 2 inches in height.
Aging Brings a Decline in Financial Literacy
The Center for Retirement Research at Boston College issued a 2015 study titled How Does Aging Affect Financial Decision Making? This study asked two important questions.
- Does declining cognition reduce financial literacy and the ability to make sound decisions?
- Do those with declining cognition lose confidence in their ability to manage their money?
The answer to the first question is not unexpected. Declining cognition is associated with a significant decline in financial literacy. However, the answer to the second question is not quite as easy to understand. Those with declining cognition did not lose confidence in their ability to manage their own money.
The results of the first two questions are further supported by an earlier 2011 study titled Old Age and the Decline in Financial Literacy. The authors investigated whether knowledge of basic concepts essential to financial choice declines after age 60. They concluded that financial literacy scores decline by about 2% each year after age 60, and the rate of decline does not increase with advanced age. They also concluded that confidence in one’s financial decision making abilities does not decline with age. Increasing confidence and reduced abilities can explain poor credit and investment choices by those older adults.
Decline in Financial Literacy and Risk Taking
Several studies have been performed evaluating risk taking of older adults compared to risk taking of younger adults. The various studies used different age groups in their analysis; however, the results of the studies were quite similar. The studies concluded that older people approach risk with a more optimistic outlook and are less deterred by the risk of loss. Therefore, older adults are more likely to make riskier decisions than younger adults.
Emotions may play a significant role in determining if someone chooses a riskier option. However, cognition helps decide which is the riskier choice. The study concluded that younger adults made better choices than older adults. Older adults were more daring in their choices than younger adults. One study concluded that these differences in decision quality are attributable to the decrease in “fluid intelligence” in old age—that is, to older adults’ decreasing ability to process information and solve problems quickly.
The Consequences of a Decline in Financial Literacy
It is clear that as we age, changes occur in our lives. One of those changes is a decrease in financial literacy. A decrease in financial literacy without a decrease in confidence about how we handle our money, along with an increase in risk taking, can have dreadful consequences.
There are many examples of individuals or couples living outside their means. This includes: going on a spending spree by using funds invested for retirement income, maxing out credit cards, making unwise purchases or supporting their adult children. These individuals are living without a budget or a trusted advisor to guide their spending.
Seniors are more susceptible to scams. This might include a free lunch or dinner with an investment pitch before dessert. The presenter discusses the high rate of return of a particular investment with “only a few opportunities left”. The salesperson may convince the senior to purchase an annuity or life insurance which may not be needed.
Not preparing a detailed financial plan for investments or spending is a common mistake for those who find themselves in trouble financially. Not having a plan may lead to the purchase of risky investments or not maximizing your expected return. Other important components of a financial plan include understanding health insurance and medical expenses, medicare and social security. These are all complex topics for those with declining cognition.
What To Do About a Decline in Financial Literacy
There are no cures to aging. There are, however, things which can be done to: delay loss of muscle mass and function; increase flexibility; and improve our heart rate. There are many mental games to attempt to keep the brain operating at a high level. However, the jury is still out on whether those games are really effective.
You must prepare yourself that at some point you will not be operating at your peak. However, if you can’t prevent the decline in financial literacy you can identify people and tools to help ensure financial decision-making happens as you intended. We all believe the decline of financial literacy will never happen to us. That is why it is important not to wait too long to engage the right people and use the necessary tools.
People and Tools To Help
At any age it is important for you to have a fully executed will, health care proxy and power of attorney. Depending upon how comfortable you are with these legal documents, you can use do it yourself tools or you can engage an attorney. In addition, your final letter of instructions is a great tool to get all your information in one place, so others can assist you now and in the future.This sample editable letter has lots of detail to make life easier for those who need to track down your personal information.
Budgeting, saving, spending and investing don’t end at a certain age. You need the expertise to address the finances of everyday life. You need help investing and protecting what you have. If you don’t have those skills, find someone who does. Financial literacy in America is at an all time low. Therefore, in all cases, family and friends may not be the answer.
Find a financial professional you can trust. They may include a Certified Public Accountant (CPA) who carries the personal financial planning designation, a Certified Financial Planner (CFP) or a Financial Advisor. You may also find a social service agency in your area that provides these types of services.
Please share your experiences with a decline in financial literacy. Both the problems and solutions would help our readers.