• Retired Investor
  • Aging’s Adverse Impact on Decision Making

    by Charles Rotblut, CFA

    The aging process can hurt your ability to make proper decisions about your finances. On average, 29.2% of individuals aged 80 to 89 have cognitive impairment.

    This somber fact was the subject of a presentation at the Morningstar Investor Conference, which I attended shortly before press time. David Laibson, a professor of economics at Harvard University, displayed several statistics showing how decision-making skills deteriorate late in life. His data confirmed articles I have read elsewhere.

    I realize this is a sensitive subject. Nobody wants to admit they are losing their mental abilities. Plus, the statistics do not apply equally across the population, as some 90-year- olds remain very sharp. The aging process affects everyone differently, and physical health, emotional health, stress and genetics are all contributing factors.

    There is also the sense of losing control that some may have. This is understandable, especially for those who have always been in control of their finances and worked very hard to build their wealth. Unfortunately, unlike a physical ailment that presents clear symptoms, it is difficult to notice that your own mental capabilities are worsening. As Laibson said during his presentation, “We don’t remember that we have a bad memory, and we don’t know how bad it is.”

    What the Statistics Show

    Laibson’s presentation was filled with statistics documenting declines in mental abilities as age progresses. I spoke with him briefly about a possible future article for the AAII Journal based on his research, but in the meantime, I wanted give you some of the statistics.

    A person’s ability to solve problems peaks around age 20. Offsetting this gradual decline during midlife is an increase in “crystallized intelligence” (e.g., knowledge). Thus, our wisdom compensates for worsening problem-solving skills. There is a limit to this compensation, however, with 53 being the prime age for making financial management decisions.

    In fact, middle-aged applicants tend to get the best interest rates on loans, whereas young adults and seniors pay much more. Why? Individuals in their 20s lack high-paying jobs, wealth and financial skills. Seniors are less likely to accurately compare rates, ask for better terms or fully grasp what they are paying for.

    A big reason for this has to do with mental capacities. On average, an 80-year-old performs at the 16th percentile for cognitive tasks. Cognitive impairment is 29.2% for the 80–89 age group and 38.8% for those aged 90 or older. Mild dementia is a common diagnosis, with two million new cases of dementia diagnosed every year.

    Financial Steps You Can Take

    Laibson provided several suggestions for protecting a retiree’s portfolio from these risks. The audience was primarily financial advisers, and Laibson’s advice was targeted to this group, but he suggested several useful steps that individuals could follow.

    The first is to set up a durable power of attorney, a living revocable trust, a living will, a health care proxy and a will. Laibson told advisers that this should be the default policy for every client when they turn 65.

    The second is to perform a regular annual check-up of finances and related documents. This is something I strongly advise as well. Make sure all beneficiary and estate documents are current and that they reflect any changes in family status and contact information.

    Finally, guard against financial mischief and ensure against both longevity and inflation risk. Laibson recommends annuities. I suggest consulting your children or a trusted individual for a second opinion before making significant changes to your portfolio. Also realize that stocks can help your portfolio grow faster than the rate of inflation.

    —Charles Rotblut, CFA, Editor, AAII Journal

    Other Articles in the Retired Investor Series:

    Limiting Required Minimum Distribution Costs, May 2011

    Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/CharlesRAAII.


    Jack from GA posted over 5 years ago:

    I find it interesting that annuities are recommended for that age group. Certain seems a poor choice to me. Many of that age still have pensions unlike younger folks.

    Charles from FL posted over 5 years ago:

    This was a very interesting article.We all have to be realistic about the effect of aging on our mental skills as we age. I agree with most of this article and I have about 10%of our liquid assets in a variable annuity with Vanguard.I have not annuitized yet but am scheduled to do so in 4 years at age 75.I have options before and at that time so I will be interested in any future information on why annuities are recommended and what type(fixed or variable)

    Donald from CA posted over 5 years ago:

    A year+ ago we bought our second immediate annuity, but only to free up other money for investment. The added annuity is providing part of the normal income requirements. CD's paying 1-3% just don't make sense when an immediate annuity will pay 8%++. So now we have a guaranteed lifetime income stream, and the other 50-60% cash which is freed up (because of the increased annuity cash flow) can be put into the market - and so what if you lose a little - vs the gains possible. In the 12 months we've picked up 7.3% on our portfolio. Ladder your annuities, also. It's worked for us.

    When I lose it mentally, I have a son who can take over.

    Joseph from FL posted over 5 years ago:

    I did the trust, etc. and turned my portfolio over to a money manager who is well rated. But I am disappointed in the performance so I feel I have to go back to doing it myself which is why I joined AAII. But at 74, I have some doubts I have the incentive to do so.

    Gerald from NE posted over 5 years ago:

    We were advised to put our IRAs in annuities just before the last big decline. The result is that we now are taking out a set amount and the principle is static or growing. I have also purchased a good amount of Berkshire Hathaway B stocks. Not a lot of growth lately but, since I live in Omaha, I get to go see a couple of older guys once a year who are still pretty saavy when it comes to investing, Warren and Charley.

    John from VA posted over 5 years ago:

    I find the advice and discussion of annuities interesting. I have always had a rather poor opinion of annuities due to their high expenses and usually poor returns compared with self invested monies. It may be that I'm not in the group yet who find these attractive (65 and still working part time). What are good sources of information regarding best types and companies for annuities? Also, any thoughts about periodic testing to check mental status and abilities?

    Jim from CA posted over 5 years ago:

    At age 78 I investigated annuities again and came away with the same viewpoint I've always had. It's not that difficult to earn 7-10% on your money while still keeping control of your asset.

    Bruno from MI posted over 5 years ago:

    Some time ago I read an article telling that banks were advising their investment officers to not promote annuities with people 65 or older yet banks and everyone in the investment world would like to sell annuities regardless of age. One thing that many not realize is that associated with the annuities are high fees and surrender fees if money is withdrawn before certain period typically seven years or so about. Of course not all is negative as there advantages in placing certain sum of money into annuities since they gurantee an income during good and bad times.

    Ellen from AZ posted over 5 years ago:

    Some people do not realize that the "interest" immediate annuities are paying out is actually a return of principal and interest. Also,interest payout rates for annuities are based upon current market interest rates. Obviously these rates are extremely low.

    As a financial advisor, I cannot justify investing in an immediate annuity unless an individual falls under the category of "special circumstances".

    Peter from OK posted over 5 years ago:

    Annuities are expensive Autopilots.
    Teach your children well.
    Beware of Professional help.
    Vet them carefully. Watch the tide go out a few times
    to make sure they are wearing a suit.

    Jeff from TX posted over 5 years ago:

    I am a new subscriber and am surprised you would recommend Annuities. I do not wish to give up my principal for a small monthly check. It seems to me that a good no-load balanced fund is still the best bet. I put $100,000 in the Vanguard conservative managed pay out fund and took a pretty good hit as first as that is when the market went way south in 2008. Since then I have drawn out $500 per month and have came back to $90,000. Lost some principal but still have control over my money.

    Chuck from WI posted over 5 years ago:

    I have been a life insurance agent for 37 years, and before that time practiced tax law. Annuity sales are driven by large commissions with 3% generally being the lowest rates. You can buy commission free annuities from Berkshire Hathaway Life on their website. You can also buy inflation adjusted annuities at incomesolutions.com. Inquire about their commission rates, which can be as low as 1%.

    With all the reasons NOT to buy annuities, it still remains that the central problem of financial planning is to create an income stream that withstands longevity and a confiscatory government policy of inflation

    Barton from NC posted over 5 years ago:

    When I was 50 thirty years ago, I ignored "good advice" and started to buy 30 year treasury bonds at rates near 10%. They are now coming due. My wife and I have both used non income producing inherited assets and grossly inflated stocks (like GE in the days of chairman Welch) to fund charitable gift annuities and derive nice tax deductions.

    Brian from ME posted over 5 years ago:

    Annuities are appropriate for crisis management of suddenly appreciated financial cognitive impairment but should not be necessary with proper planning while financial cognition is intact. I agree the central problem of financial planning is to prepare sustainable ivestment processes creating an income stream that withstands longevity and a confiscatory government policy of inflation.

    Timothy from FL posted over 5 years ago:

    One of the commentors said 8% annuity payments looked very nice. Another wisely pointed out that annuities are really returning a mix of earnings and principal. My concern is scary inflation. Back in the 1970's some colleagues took advantage of an early retirement package with guaranteed 9% return. Two years later they were submerged with 20% inflation (which nobody saw coming). With our government printing unbacked money, and borrowing 40% of operating expenses, we are heading for a brutal comeuppance.

    William from CA posted over 5 years ago:

    At 80, cognitive impairment is a problem for many (for some, much earlier). Part of the problem is losing the desire to do the work of managing the portfolio. However, annuities are a poor investment for most due to their high fees and expenses. Buying good companies as well as some bad ones has worked well for me the last 15 years.

    Hathshire from CA posted over 5 years ago:

    Age, I'm 89, does impair cognitive ability. Maybe not ability but in my case desire to make any important decision.

    Donald from WA posted over 5 years ago:

    For the past several years (I am now 85), I have been aware of what is now a lack of interest in attending to finances. As I read through the discussion above, there were more than a couple of similar comments. So I thought I would add my thought about that as others may be having a like experience.

    James from IL posted over 5 years ago:

    I have never favored annuities. At this age, 84, and with the current spendthrift irresponsible administratio in Washington, I am increasing my investments in tax-free bond funds with my excess cash. I have one that is never mentioned- MFS Municipal Income Trust symbol MFM that currently pays over 7% on the purchase price. I have owned it since its inception and it pays every month. It has increased payout over the years and never reduced it. I also have money in Vanguard and Fidelity

    Thomas from PA posted over 5 years ago:

    Annuities are for individuals who have no interest or ability to invest their own money.
    If you are intersted in investing and spent the time learning the principles by studying financial publications then it is a waste of money to buy an annuity.

    Bernice from NY posted over 4 years ago:

    I have two annuities, one currently paying out
    (inherited) & one I'm required to annuitize
    soon, I'm 84 without a pension. I have muni bonds (many of the best ones were unexpectedly
    called in '08) some stocks but glad my husband
    bought these annuities many yrs. ago.

    Mercere Collins from TN posted over 3 years ago:

    I see there are a lot of questions and concerns on the part of members, but where are the replies?

    Elaine from MI posted over 3 years ago:

    Found the article and letters most meaningful
    Thanks!! to all.

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