Planning for the possibility of cognitive decline

New research shows that mental deterioration hits some groups of retirees harder than others.

Cognitive decline is an unfortunate consequence of aging — one that affects as many as two-thirds of people. But new research suggests it hits several groups hardest: those who are white, male and have college degrees.

Financial professionals say that the results underscore the importance of planning ahead for Alzheimer’s and other forms of cognitive decline, regardless of clients’ demographics.

“The biggest challenge is that cognitive decline is multifactorial. It’s not like you go from being fine to having dementia. Some people have mild cognitive impairment, and they can have that for a long time,” said Carolyn McClanahan, director of financial planning at Life Planning Partners.

NEW FINDINGS

The study, “Retirement and cognitive aging in a racially diverse sample of older Americans,” was published last month by the American Geriatrics Society. The authors found that among recent retirees, the sharpest declines in cognition were seen in white men and people with higher education. Women generally showed slower rates of cognitive decline, with Black women exhibiting the smallest decreases after retirement.

The academic paper is based on data from more than 2,200 retirees who are part of a wider study on strokes. Tests for cognitive abilities covered verbal fluency, memory and global function.

While cognitive function may decline faster immediately after retirement, especially for some groups, “lifelong structural inequalities including occupational segregation and other social determinants of cognitive health may obscure the role of retirement in cognitive aging,” the authors of the study wrote.

PART OF EVERY PLAN

Regardless, helping clients plan for cognitive decline well before it happens is critical, advisors said.

“Chances are, it’s going to happen to you. It doesn’t matter who you are,” said Chris Heye, CEO of Whealthcare Planning. There are genetic and lifestyle contributors to one’s risk, but “even if it’s not cognitive decline, bad shit happens. You have a heart attack, you have a stroke.”

Major medical issues, or even traumatic events like the death of a family member or friend, can end up leading to poor financial decisions, Heye said.

“As you get older these behavioral issues come up. Your memory may still be good … [but] your judgment starts to get a little messed up. Often as we get older, unfortunately for many of us there is a decline in what psychologists call executive function,” he said. That can reduce impulse control, and “when that starts to go, that can be very dangerous. That’s when you start making the rash financial decisions.”

A couple of statistics Heye notes: Half of people develop mild cognitive impairment or dementia by their mid-80s, and 80% have some type of chronic illness by 55.

“You can have the best financial plan created by man, and if something happens cognitively, hundreds of thousands, or millions, can disappear from an account in weeks or months,” he said. “If you’re not guarding against those decisions, you’re never really safe.”

ELDER ABUSE

With cognitive decline comes the risk that people are targeted by scammers or fall victim to various forms of elder abuse — even by family members.

However, those who work with a trusted advisor may be more likely to have taken steps to help avoid financial abuse. According to a 2019 survey by AIG Life & Retirement, 64% of those with advisors have trusted contacts named, and they were also twice as likely as those without advisors to have a durable power of attorney in place. Further, 84% of people said they expect financial professionals to inform them of suspected financial abuse, and 81% indicated they would be comfortable talking with an advisor if they were the target of a scam or abuse, the insurer found.

SELF-AWARENESS

“The notion that cognitive abilities decline with age is relatively well established. However, it’s the gap in actual abilities and perceived confidence that probably worries me the most,” David Blanchett, head of retirement research for PGIM DC Solutions, said in an email. “For example, if you are aware your abilities are declining, you can (in theory) seek out help. If, though, you aren’t aware it’s occurring, a potential ‘gap’ emerges (in actual confidence and ability) that creates a clear danger for retirees.”

A paper last year from the National Bureau of Economic Research found that “suboptimal timing of the transfer of control” over assets, particularly due to delays amid unnoticed cognitive decline, poses risks — including the risk of financial fraud — to older adults.

A 2021 paper by Vanguard senior researcher Anna Madamba found the average “welfare cost of a mistimed transfer … is equivalent to 14% of net worth.”

FINANCIAL LITERACY

Further, research shows that financial literacy declines with age during retirement, and that’s coupled with a rise in overconfidence, according to a 2015 paper from Texas Tech University and the University of Missouri.

On a financial literacy test given to nearly 3,900 respondents, scores showed a steady decline of one percentage point per year after age 60, states that paper, “Old Age and the Decline in Financial Literacy.” The test covered basic personal finance as well as investments, credit and insurance.

Researchers found that “the rate of decline in financial literacy is nearly identical among men, stockowners, older and college-educated respondents.”

Additionally, older respondents in that study appeared more likely to pay high mortgage interest rates and were less likely to shop around for the best credit card rebates.

Hiring a financial advisor can help mitigate the impact of cognitive decline, though clients should be aware of whether advisors are acting in a fiduciary capacity, Blanchett noted.

Since people often are unaware that they are in cognitive decline, it can be useful to set up regular screenings and plans around changes they experience, he said.

Allocating assets to retirement-income options that require little engagement from the owner could be a helpful option, Blanchett said.

“While this would include things like generating more guaranteed retirement income through delayed claiming of Social Security benefits, it could also be through allocating to annuities that generate income at older ages,” he said. “This can be done proactively (e.g., through purchasing a deferred income annuity at retirement) or reactively as things change through some type of product that provides immediate income (e.g., buying an immediate income annuity once cognitive scores start to slip).”

PLANNING AND ACTION

Heye recommends having a team in place, including an advisor, multiple family members and medical professionals. Putting a plan and a power of attorney in place well ahead of time can help avoid some of the strife among family members who have different ideas about how to best care for a parent, he noted.

If the client is adamant about staying active with their investments, setting aside something like 5% of their assets in a trading account can be a solution, he said.

“Don’t try to do this all on your own,” Heye said.

Two or three years before a client plans to leave the workforce, McClanahan said they start to plan how they will fill their days. A lack of activity can be mentally devastating.

“Work brings a lot to the table in terms of people being cognitively healthy,” she said. “A sense of purpose is important for people to maintain good mental engagement.”

Still, even taking the right steps to reduce the risk of dementia or other cognitive decline is hardly a guarantee that people won’t develop it, she noted.

“When people are in their late 50s or early 60s, we take them across the four big things of aging,” McClanahan said, which include when to get help with health care decisions and financial decisions, and knowing when to move to a safer place and when to quit driving.

The firm also has “incapacity letters” clients can sign ahead of time, directing advisors to speak with surrogates if red flags appear in their mental health, she said. However, McClanahan’s never had to enforce a letter, as clients have been happy to direct the conversations to their children or other representatives.

“A lot of people don’t like to talk about it [ahead of time],” she said. “But when the poop hits the fan, everybody’s glad you took the time to set the stage.”