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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free 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?
-
Dow Adds 646 Points, Hits New Highs: Stock Market TodayIt was "boom" for the Dow but "bust" for the Nasdaq following a December Fed meeting that was less hawkish than expected.
-
5 Types of Gifts the IRS Won’t Tax: Even If They’re BigGift Tax Several categories of gifts don’t count toward annual gift tax limits. Here's what you need to know.
-
The 'Scrooge' Strategy: How to Turn Your Old Junk Into a Tax DeductionTax Deductions We break down the IRS rules for non-cash charitable contributions. Plus, here's a handy checklist before you donate to charity this year.
-
I'm a Tax Attorney: These Are the Year-End Tax Moves You Can't Afford to MissDon't miss out on this prime time to maximize contributions to your retirement accounts, do Roth conversions and capture investment gains.
-
I'm an Investment Adviser: This Is the Tax Diversification Strategy You Need for Your Retirement IncomeSpreading savings across three "tax buckets" — pretax, Roth and taxable — can help give retirees the flexibility to control when and how much taxes they pay.
-
Could an Annuity Be Your Retirement Safety Net? 4 Key ConsiderationsMore people are considering annuities to achieve tax-deferred growth and guaranteed income, but deciding if they are right for you depends on these key factors.
-
I'm a Financial Pro: Older Taxpayers Really Won't Want to Miss Out on This Hefty (Temporary) Tax BreakIf you're age 65 or older, you can claim a "bonus" tax deduction of up to $6,000 through 2028 that can be stacked on top of other deductions.
-
Meet the World's Unluckiest — Not to Mention Entitled — Porch PirateThis teen swiped a booby-trapped package that showered him with glitter, and then he hurt his wrist while fleeing. This is why no lawyer will represent him.
-
Smart Business: How Community Engagement Can Help Fuel GrowthAs a financial professional, you can strengthen your brand while making a difference in your community. See how these pros turned community spirit into growth.
-
In 2026, the Human Touch Will Be the Differentiator for Financial AdvisersAdvisers who leverage innovative technology to streamline tasks and combat a talent shortage can then prioritize the irreplaceable human touch and empathy.
-
How Financial Advisers Can Deliver a True Family Office ExperienceThe family office model is no longer just for the ultra-wealthy. Advisory firms will need to ensure they have the talent and the tech to serve their clients.
