If you've ever had to watch a loved one's mental capacity decline as they age, then you know the heartbreak of watching someone realize that something is wrong, but not be able to articulate the problem. At first, it shows up as just losing a train of thought. Then it progresses to forgetting where keys are, and then eventually, it ends up in a complete loss of cognitive ability.
Yet when we reach the age of retirement, typically in our sixties, we are expected to, for the rest of our lives, wisely shepherd and manage our assets so that we don't run out of money. As research from Dr. Timothy Salthouse from the University of Virginia's Department of Psychology shows, we are planning on making these critical investment and financial planning decisions just when our cognitive capacities decline. Typically, our cognitive abilities start to show a decline when we reach age sixty, and we shift our mental processing to utilize accumulated experience to account for a decreased ability to process novel concepts and situations. If you've ever seen an elderly person who is a whiz at the crossword puzzle but has trouble adapting to the Internet, you've seen this in action.
Because of this cognitive decline, older people are more susceptible to a myriad of risks. Among them:
--Scams. There's a reason that most of the stories you hear of people falling for the Nigerian prince e-mails that we all receive involve the elderly.
--Speculation. As assets decline, the elderly can be convinced to invest in speculative offerings which are simply not appropriate for their situation.
--Forgetting obligations. Because memory declines with age, the elderly are more susceptible to forget to put the check in the mail to pay the electric bill, mortgage, or some other recurring bill.
Since the change occurs slowly, it takes a great deal of both self-awareness and proactivity to take action before something negative occurs. Here are a few steps that you can take to ensure that you protect your assets from your less cognitively capable future self:
--Set up automatic bill payments. The fewer items which you have to remember each month, the less likely you are to make a mistake.
--Document your assets, bills, and debts. Write down where your accounts are and what bills you have to pay so that if someone needs to step in, it's easy to find out where things are and to pick up for you if you're not able to.
--Identify who you want as your conservator long before you need one. Find someone whom you trust to be the person to manage your affairs in case you're not capable of doing so.
--Make sure your wishes are recorded. In the event of your incapacity, you want to confirm that the person who is stepping in knows your desires and acts accordingly. Set up automatic alerts to be sent to you and to the person you designate.
--Set up alerts. If a bill is missed or an account is overdrawn, it will trigger a notification and be the cause of a discussion to make sure you can still handle your affairs.
--Consider shifting assets towards income generation. While annuities may not be the optimal investment for expected value, they are a reasonable alternative to protect yourself from making bad investment decisions in the future when you're cognitively impaired.
Acknowledging your future decline and mortality is difficult. So is giving up control. It's the reason that economists struggle with what is called the annuity puzzle--retirees should convert far more of their assets to income than they actually do. However, by setting up boundaries and triggers now, you can protect yourself from a time when you don't realize that you've lost your cognitive capabilities. You don't want to be digging yourself a financial hole when you're not even cognitively capable of realizing that you've dug the hole.
Jason Hull is a candidate for the CFP(R) Board's certification, is a Series 65 securities license holder, and owns Hull Financial Planning.
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