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
-
Scammers Are Pretending to Be From Your Utility Company. Here's How To Shut Them DownWith scams in the utility sector on the rise during cold winter months, companies are spreading the word for customers to be on the lookout for fraudsters.
-
Why More Retirees Might Come Out of Retirement
It’s often not solely because of financial reasons, but because of a lack of purpose in retirement. This financial expert can relate.
-
Why More Retirees Might Come Out of Retirement
It’s often not solely because of financial reasons, but because of a lack of purpose in retirement. This financial expert can relate.
-
What Would Accreditation Change Mean for Real Estate Investors?
Investors determined by a test to be ‘financially savvy’ would be allowed to invest in ways that they can’t now without having a certain level of assets.
-
Five Simple Year-End Tax Tips to Set Up a Successful 2024
If you wait until the new year, you may miss out on some valuable tax planning strategies. Here’s what you need to know before closing out 2023.
-
Six Estate Planning Tips for Younger Generations
Millennials and Gen Zers are taking their estate planning seriously. These tips can help make the process seem less daunting.
-
Year-End Tax Planning for a Financially Healthier Retirement
Getting your tax ducks in a row for the end of the year can decrease your tax liability and make the most of your income, now and in retirement.
-
Where to Start Financially After a Life-Changing Diagnosis
Dealing with an illness, yours or your child’s or that of another loved one, is hard enough without adding financial duress. Here are some considerations and suggestions for covering expenses.
-
Six Ways to Prepare for Widowhood and Protect the Surviving Spouse
No one wants to have to plan for losing their spouse, but having plans in place and knowing what to do when the time comes can alleviate at least some of the stress.
-
Creating a Blended Family? Three Key Steps to Consider
Blended families can make your finances and estate extra complicated, but you can head off some of those issues with careful planning.
