Is Your Estate Ready if You Experience Cognitive Decline?

Once your cognitive abilities begin to decline (which can start in your early 60s), your accounts could be at risk. Here’s how to protect them.

An older couple with their arms around each other look toward their family in a field.
(Image credit: Getty Images)

We all know that planning for retirement is crucial during our working years. The goal is to make sure you have enough money tucked away to maintain your standard of living and support yourself in the event of a major life change, such as the death of a spouse or a severe illness.

Elder law attorneys work to ensure clients are protected on a legal basis by making sure clients develop advance medical directives, appointing a power of attorney and sorting through trust agreements. But how do you make sure you’re protected financially if you experience a cognitive decline in your abilities?

A study by the Texas Tech Financial Literacy Assessment Project found that our ability to make financial decisions and apply them correctly peaks in our early 50s. According to the research, that ability starts to decline around 2% each year after you turn 60. Once your cognitive abilities begin to decline, your accounts are at an increased risk.

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When cognitive abilities start to decline

It’s important to keep in mind that as you age, your cognitive abilities may start to decline, which needs to be accounted for in your portfolios. That means portfolios that include stocks, bonds and mutual funds may no longer be suitable. Many family members realize this but are afraid to talk to their loved ones about such a sensitive subject. Many investors want to protect their nest egg against market risks, but when they look at the interest rates being provided by banks, they do not see any other options.

Very large financial institutions have recognized this and have created plans that protect against market losses, but still provide an opportunity for higher returns with zero risk to a customer’s principal.

When it comes to planning for your retirement, you can never be too prepared. As you’re planning, sit down with your financial adviser and figure out what steps you can take to protect your finances. You might find that the current plans you have in place need to be updated.

In addition to talking to your financial adviser, it’s important to talk with your family and figure out a plan for your finances if you become cognitively impaired.

What to plan with your family

Here are some important topics you’ll want to discuss as you make your plan:

Appoint a power of attorney. This individual will be responsible for making all financial and legal decisions on your behalf if you are unable to do so. This person should be someone you trust and who has your best interest at heart.

Create a living will. This legal document explicitly outlines the medical treatment you are to receive should you become unable to make that decision for yourself. You can also designate someone to make medical decisions on your behalf when you are no longer able.

Discuss long-term care. It’s important to figure out plans for long-term care. If you end up suffering from Alzheimer’s or dementia, you’ll need care around the clock. You and your family will need to discuss living arrangements and care options in case that happens.

Will you live with your children so they can take care of you, or will you live in a nursing home? If you decide a nursing home is what’s best, it’s also important to discuss how that will be paid for.

Create a plan for your estate. Take this time to figure out how your wealth and assets will be distributed after you die. This will ensure that your wishes are followed and will save your family from scrambling to make last-minute decisions regarding your estate.

These conversations certainly aren’t easy or enjoyable to have, but they are crucial. Life is unpredictable, and certain things are out of your control, but making a plan for yourself and being prepared is something you can control. Be sure to take advantage of it while you can.

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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.

Patrick M. Simasko, J.D.
Partner, Simasko Law

Patrick M. Simasko is an elder law attorney and financial adviser at Simasko Law and Simasko Financial, specializing in elder law and wealth preservation. He’s also an Elder Law Professor at Michigan State University School of Law. His self-effacing character, style and ability have garnered him prominence and recognition throughout the metro Detroit area as well as the entire state.