How Aging Imperils Your Finances

As we grow older, our ability to make sound financial decisions degrades, but if we prepare, we can maintain healthy finances well into old age.

If five people win a lottery and the prize of $2 million is divided evenly, how much will each winner get? If you answered $400,000, congratulations. Your reasoning skills are better than those of half of all Americans age 50, according to one experiment. Here's something even scarier: The same experiment showed that you're sharper than three-fourths of people who are 85 and almost everyone who is 90. That's a glimpse at how our problem-solving skills diminish as we age.

Sumit Agarwal, a senior financial economist with the Federal Reserve Bank of Chicago, says that many simple experiments like this one prove the phenomenon. Worse, other research shows that older Americans "are making mistakes on more-complex decisions involving credit cards, home equity and how to pay for health care," says Agarwal.

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Bob Frick
Senior Editor, Kiplinger's Personal Finance