Suggestions for Managing the Risk of Cognitive Decline

Cognitive impairment has a direct, negative impact on a person’s and couple’s finances, yet many do not want to talk about it.

Cognitive impairment has a direct, negative impact on a person’s and couple’s finances, yet many do not want to talk about it. A State Street survey found that only 32% of investors have discussed planning for possible cognitive decline with family members. More importantly, only 39% of investors have a suitable plan for if and when their decision-making skills diminish.

Given this backdrop, State Street Global Advisors published a report oriented toward advisers on how to address the challenges of planning for cognitive decline. Many of the suggestions are also useful for individual investors who manage their portfolios themselves. Those suggestions include:

Proactively Plan: The majority of investors think they will be able to make decisions regarding their finances after they experience symptoms of cognitive decline. This means that investors incur the risk of not recognizing impaired decision-making abilities until after problems have already occurred. State Street says that the ideal time to plan is when investors are in their early-to-mid 50s. Decision-making abilities will be at their peak around this age. Investors become more aware of the need to protect their finances as they start to see the impact of cognitive impairment on others they know. Plus, investors begin to start considering their post-retirement needs at this age.

Stop Procrastinating: Fear and uncertainty are among the top reasons for not discussing the possibility of cognitive decline and developing a plan for it. This can cause problems not just for the investor’s spouse, but also for the couple’s children. Adult children typically step in to assist their parents with managing finances after some event overwhelms or confuses the parent. The stress from the unexpected situation only adds to the anxiety surrounding the transfer of responsibilities. This is why the best time to have such discussions is while a person still has full cognitive abilities.

Establish Guidelines and Directives: Investors should maintain up-to-date directives, powers of attorney and other estate documents. Store all such documents in a safe place known and accessible to family members. Advisers are encouraged to have clients write a diminished capacity letter, an idea that investors who don’t work with an adviser can borrow. A multigenerational transition plan can also be helpful.

Source: “The Impact of Aging on Financial Decisions,” State Street Global Advisors.