A new paper from the LIMRA Retirement Income Institute notes that 30 per cent of adults over age 65 in the United States experience diminished cognitive capacity – declines which can result in average household losses of roughly $124,000 (figures in U.S. dollars), driven by missed payments, fraud and poor financial decisions.
“While market volatility and inflation often dominate retirement planning discussions, new research from the LIMRA Retirement Income Institute finds that age-related cognitive decline may pose an equally serious threat to retirement security,” LIMRA writes in a statement announcing the study’s publication.
Decision-making risk
Entitled Decision Risk and the Desirability of Protected Income, the paper goes on to say that annuities are in fact a form of cognitive insurance, protecting against the risk of declining financial decision-making capacity. “Annuities help insulate retirees from the possibility that deteriorating cognition, unwanted behavioural changes, or financial exploitation could undermine their financial security,” the paper states.
“Decision-making risk is emerging as a major threat to retirement security, operating alongside – and sometimes independent of – market risk,” they write. “Nearly 30 per cent of adults over age 65 experience diminished cognitive capacity, with financial management often among the first skills to decline.”
Self-confidence declines with age
Worse, they say studies have found that general self-confidence declines with age, but confidence in financial knowledge often does not decline at the same pace as cognitive ability, “suggesting that overconfidence is a risk factor,” they write. “Loneliness and social isolation have been linked to diminished decision quality, increased susceptibility to financial exploitation and greater difficulty evaluating complex choices.”
The report also cites research noting that individuals who later develop dementia begin missing bill payments and experiencing other indicators of financial distress as much as six years prior to diagnosis. Similarly, credit scores begin to deteriorate several years before clinical recognition.
“Many individuals remain responsible for making complex financial decisions during a lengthy period when their decision-making capacity is already deteriorating.” The paper also notes that many individuals will experience declining financial decision-making ability, well before age 65.
“Recognizing decision-making risk as a meaningful determinant of retirement outcomes has important implications for financial planning,” it adds. “This decision-making risk perspective shifts the focus of retirement planning from managing assets alone to managing the risks associated with (suboptimal) financial decisions.”
