How to Guard Your Finances in Case Cognitive Decline Sets In

Many of us are at risk of cognitive decline, but there are things we can do to protect our finances from its effects.

An adult daughter hugs her mom on the beach.
(Image credit: Getty Images)

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.

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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.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Chris Heye, PhD
CEO, Whealthcare Solutions

Chris Heye, PhD, is the CEO and Founder of Whealthcare Solutions, Inc. and Whealthcare Planning LLC. Dr. Heye is a technology entrepreneur who writes, researches and speaks on subjects that reside at the intersection of health, personal finance and longevity. He helped design and manage a clinical study conducted at the Massachusetts General Hospital that investigated the behavioral and cognitive underpinnings of sound financial decision-making. The results of that study serve as the foundation for Whealthcare’s innovative applications that enable adults and their families to more effectively plan for health- and longevity-related financial risks.