The greatest threat to the financial security of many older adults isn’t a recession, market correction or inflation. It’s the risks posed by health-related events.
Roughly 78% of adults over the age of 55 in the U.S. have been diagnosed with at least one chronic illness, such as diabetes, asthma or arthritis, according to the CDC. And 1.9 million people were diagnosed with cancer last year, according to the American Cancer Society. But the greatest health-related threat to financial wellness and retirement security is cognitive decline.
Unlike the progress we are seeing in other medical fields like cancer and heart disease, success in finding a cure for dementia has been elusive. Alzheimer’s is the only disease among the top 10 causes of death in the U.S. that cannot be prevented, cured or even meaningfully slowed.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Cognitive decline can affect management of finances early on
Cognitive decline can have devastating consequences for personal finances and sound financial decision-making. The ability to manage finances is one of the first cognitive skills to deteriorate, leaving many people vulnerable to suboptimal financial decision-making and an ever-growing array of pernicious financial scams.
As the population in the U.S. ages, the likelihood that someone you know experiences cognitive decline will increase. According to the Alzheimer’s Association, an estimated 11% of adults over the age of 65 in the U.S. today are living with Alzheimer’s, and an additional 3% suffer from related illnesses.
According to the American Academy of Neurology, an additional 15% of adults over 65 in the U.S. suffer from mild cognitive impairment (MCI) — defined as a “level of cognitive decline that requires compensatory strategies and accommodations to help maintain independence and perform activities of daily living.” Adults with MCI experience cognitive decline that goes beyond “normal aging.”
Together, the estimates suggest that about 29% of adults 65 and over are already having difficulty making sound financial decisions. And like many diseases, the likelihood of having dementia or MCI increases with age. By age 82, there is a 50% chance that a person has either dementia or MCI. And by the time they reach age 90, there is better than an 80% chance they have dementia or MCI.
Unfortunately, suboptimal financial decision-making is likely to occur even earlier. A comprehensive study found that financial decision-making mistakes follow a U-shaped pattern, with the “peak age” of financial decision-making occurring at around age 53. This suggest that difficulties with financial decision-making for many people begin well before the onset of a serious cognitive illness.
We can’t assume we’ll avoid cognitive decline
Since it is a virtual certainty that all of us will experience a decline in the ability to make sound financial decisions as we get older, it is imprudent for anyone to assume that they’ll avoid the risks of cognitive decline as long as they don’t develop Alzheimer’s.
So, what can we do to protect ourselves and our loved ones? A good strategy is to reduce the number of consequential financial decisions we need to make on an ongoing basis. We can all benefit from simplifying our personal finances and putting as much of our decision-making as possible on autopilot.
The execution of financial transactions, even minor ones, can present opportunities for accounting mistakes, judgment errors, memory lapses, impulsive decisions or financial scams. The downside risks associated with the need — or desire — to sell an existing asset, make a new investment or pay a bill tend to increase as we get older.
Reducing the number of financial accounts we need to manage, automating bill payments and assembling a team of trusted family members and professionals can all help lower the frequency of financial transactions and thereby decrease decision-making risks.
Consider guaranteed income strategies
Guaranteed income strategies like annuities can provide a similar type of protection. Because they decrease the need for, and frequency of, potentially risky financial transactions, they shield individuals and their families from suboptimal financial decision-making. Protected income products can comprise an important element of a safe and risk-reducing financial decision-making “autopilot” strategy, as they provide a regular stream of income, absent the need to execute a transaction.
Protected income products can also help guard against other health-related financial risks, like having a health event that leaves you temporarily or permanently incapacitated (cognitively or physically), outliving your savings or requiring lengthy long-term care.
Because it is likely to happen to just about all of us as we get older, reducing the decision-making risks associated with cognitive decline should be a major goal of any financial plan. For many adults and their families, protected income products can play an important role in meeting that goal.
related content
- Nine Questions to Ask Aging Parents About Their Finances
- Caring for Aging Parents Takes Planning Ahead and Patience
- What Gen X Needs to Know About Their Aging Parents' Finances
- Insuring Your Plan for Retirement Income
- Are You Overlooking Your Most Valuable Retirement Asset?
-
How to Shop Smarter as Tariffs Drive Up Prices in 2025Tariff fatigue is real. Here’s how to save as prices rise and uncertainty grows.
-
Retirement Reimagined: Finding Your Tribe in LGBTQ-Focused CommunitiesDemand for LGBTQ retirement communities in the U.S. is high, but inventory is not easy to find. Here are some safe havens to explore.
-
The $1 Million Retirement Question: Are You Being Tax-Smart About Your Pension?A financial planner raises some key considerations for navigating retirement with a pension and recommends four strategies.
-
The Costly Mistake You Might Be Making With Your First 401(k)Most people start contributing to their retirement savings later in life. That could be a big-time mistake, literally costing you thousands of dollars.
-
An Estate Planning Attorney's Guide to the Importance of POAsRegularly updating your financial and health care power of attorney documents ensures they reflect your current intentions and circumstances. It's also important to clearly communicate your wishes to your chosen agents.
-
Divorce and Your Home: An Expert's Guide to Avoiding a Tax BombYour home is probably your biggest asset, so if you're getting a divorce, the stakes are high. Keep it? Sell it? You need to have a good plan in place for how to handle it.
-
Fewer Agents, Fewer Audits: How IRS Staff Cuts Are Changing EnforcementSignificant reductions in the IRS workforce appear to be increasing the number of 'no change' audit closures. The shift could potentially increase the overall tax gap — the difference between taxes that should have been paid and those that were.
-
What if You Could Increase Your Retirement Income by 50% to 75%? Here's HowCombining IRA investments, lifetime income annuities and a HECM into one plan could significantly increase your retirement income and liquid savings compared to traditional planning.
-
Here's Why You Shouldn't Do an Estate Plan Without a Financial PlannerEstate planning isn't just about distributing assets. Working with a financial adviser can ensure you've considered the big picture — and the finer details.
-
Trump Tariffs and Taxes: Waiting to See What Happens Is Not a StrategyLike presidents, tariffs come and go. Policy changes also shift about every two years with the election cycle. If you're paralyzed by uncertainty, you could be missing opportunities to benefit your financial future.
