For most of us, our most important financial decisions come towards the end of our lives.
After a lifetime of work, we have to decide when to retire, when to take CPP and OAS, how to squeeze income from our savings, whether to keep the house or downsize, and how to update our will or establish an estate plan.
These are tough choices, particularly when you consider that – regardless of gender or education level – studies suggest most people become considerably less literate when it comes handling money issues after age 60.
According to Texas Tech University professor Michael Finke, test scores measuring knowledge of investments, insurance and credit issues fell slightly more than two per cent each year starting after age 60.
Financial Literacy Peaks In Late 40s
Finke and his team noted that financial literacy peaks in the late 40s and that there was a statistically strong and steady decline in financial literacy among older respondents. What’s worse, however, is that many subjects’ confidence in their financial decision-making abilities actually seemed to rise with age.
Cognitive performance clearly improves from youth to middle age, at which point it peaks before beginning a steady decline, reports Harvard University’s David Laibson. Wisdom may well rise with age, he acknowledges. But fluid intelligence – the ability to handle abstract problems – doesn’t. These two factors move in opposite directions, it seems, with the optimal balance generally occurring in mid-life.
When compared with their middle-aged counterparts, older consumers were twice as likely as those in their late thirties to jump on a teaser rate on a credit card, have more trouble estimating the value of their homes, and pay higher interest rates on consumer loans, according to Laibson’s research.
Right Side Of The Brain Takes Over
As we grow older, our brain gets more impulsive and more easily swayed by appeals to positive emotions – which helps explain why get-rich-quick artists prey on seniors.
The reason, brain researchers suggest, is that many older people stop making decisions through logical analysis using the so-called left side of the brain. Instead, they become much more right brain in the way that they process information, swayed less by numbers and logic than they are by feelings and passions.
It’s important that people acknowledge that their ability to make financial decisions may decline after age 60. Unfortunately, they many not know that it’s happening when it does, Finke notes, pointing to the similarities between driving and making financial decisions.
Plan For The Future Now
Studies of driving show that older people don’t generally sense any progressive drop-off in abilities. However, when shown objective evidence that their driving skills have diminished, they start to accept the truth and modify their driving habits accordingly.
Although it’s tough to swallow, it’s important to acknowledge that one’s ability to make financial decisions may decline over time. But there are steps you – or perhaps your parents – can take.
Like setting up a retirement-income plan where you don’t have to make complex decisions as you age or focussing on largely passive investments that automatically rebalance. In the interim, consider a financial-literacy check up with a fee-only planner whom you trust.