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We all know that cognitive decline can accompany aging. The danger is that we might not realize it’s happening to us when it does. And that lack of awareness can upend decades of financial planning and threaten your retirement.
A recent study suggests that how well we perceive our own cognitive decline can have a huge impact on our retirement success. It also found that the financial losses that can result from being unaware of cognitive decline are most felt by wealthier investors who are active in the stock market.
So, how can we protect ourselves and our loved ones from the financial pitfalls associated with unrecognized cognitive decline?
It’s a frustrating paradox. How can you recognize that you’re not recognizing things as well as you used to? Measuring the difference in investment outcomes between those aware versus those unaware of their cognitive decline was a key aspect of the research.
The study published in the Journal of Political Economy looking at just over 16,000 Americans between 50 and 80 years of age, divided people into those two groups. Those in the latter group suffered notable financial losses because of bad financial decision making. On average, respondents who were unaware of their cognitive decline saw their total wealth decrease by 8.2 per cent over a two-year period.
But the segment of the unaware group that mostly accounted for the decline was the wealthier respondents. For the top wealth quartile, the difference in wealth between those who were unaware of their cognitive decline versus those who were translated into a loss of US$92,983. But it gets worse.
When you consider the portion of wealth only represented by investments and deposits that don’t have withdrawal penalties (deemed to be assets over which people could most easily make decisions with minimal limitations), the effects of being unaware were far greater. Losses measured on these assets for those unaware of their decline were 20.5 per cent.
These are people who ostensibly demonstrated strong financial acumen for a long period of time. Yet, their confidence in their abilities didn’t waver even as their cognitive functions did.
Overconfidence with investing has long been correlated with underperformance, but when combined with unrecognized cognitive decline, it becomes an ever larger liability. The continued overconfidence with the headwind of deteriorating cognitive function can lead to increased susceptibility to poor investment choices and financial scams, both of which can erode a lifetime of savings in short order.
If you have a partner, you both need to think seriously about the continuity of your financial planning. If one partner has been more hands-on with administering the investment and tax side of your affairs, not only do you need to think about what happens if that person dies, but what if they don’t die but suffer cognitive decline they may not be aware of?
Another important measure is to designate a Trusted Contact Person (TCP). In 2021, Canadian regulators introduced the concept of a TCP, a person your financial adviser or institution can reach out to if they notice signs of cognitive decline or suspect financial exploitation.
It’s important to note that this person wouldn’t have control over your accounts. It’s more akin to the two-factor-authorization some websites and apps require.
For example, if I try to log in to certain websites while travelling, the site notices I’m in a new location and it triggers a secondary security protocol: it sends me a code to my e-mail address or phone. A TCP is kind of like that.
If your financial adviser or institution notices something odd, they can contact the TCP just to be safe.
Financial institutions and advisers are required to take reasonable steps to get you to name a TCP, but it’s not mandatory. The initiative has only been around a few years so it’s still a new concept, but it’s one everyone should take very seriously: individuals, advisers, and institutions.
Take the time to reflect on your current approach to financial management. Are there areas where you could involve others more? Have you had open discussions with your partner or family members about the future?
The steps you take now can make all the difference in safeguarding your nest egg against the multitude of challenges ahead.
Preet Banerjee is a consultant to the wealth management industry with a focus on commercial applications of behavioural finance research.
