There is increasing evidence that as we age, cognitive decline is natural and inevitable. The brain, like the rest of the body, loses its ability to respond quickly and precisely over time.
Michael Finke and Sandra Huston of Texas Tech University and John Howe of the University of Missouri recently updated a study titled “Old Age and the Decline in Financial Literacy.”
They found that average financial literacy scores fell by half between the ages of 65 and 85, and the rate of decline was consistent across characteristics like education, gender and wealth.
But that’s not the worst part. They also discovered that despite declining cognitive capabilities, confidence in financial decision-making abilities remained high. In other words, after age 60 we will begin to lose our ability to make good financial decisions – and we won’t notice that it’s happening.
The importance of financial literacy
Does financial literacy really matter? Yes, according to numerous research papers.
A study by Maarten van Rooij of Dutch Central Bank, Annamaria Lusardi of Dartmouth College and Rob Alessie of the University of Groningen revealed that people with a higher degree of financial literacy are more likely to invest in wealth accumulation investments such as stocks.
Other research has shown that higher levels of financial literacy correlate with better mutual fund selection (e.g., a higher sensitivity to cost). The relationship also applies to liabilities. Those with low literacy tend to incur higher fees for borrowing and are more likely to maintain excessive debt loads.
This should be very concerning to individuals and families. With the virtual disappearance of pensions, not to mention longer retirement lifetimes thanks to improved health care, more retirees than ever are dependent on making their own good investment, tax, risk management and other financial choices to ensure their savings last.
In addition, financial mistakes can have a more dire impact the older we get because the time available to recover from them becomes shorter. Seniors 60 and older hold more than half of all the financial wealth in the U.S., and they have become the primary targets of financial scams. Declining financial skills coupled with misplaced confidence makes older consumers especially vulnerable to complex, unsuitable and even fraudulent investments.
Find an adviser
The study’s implication is that at some point in our lives, every one of us will need to get help with our financial decision-making. Howe recommends finding a financial adviser with a good reputation who can help make every financial decision clear.
“It is important to find an adviser who has your best interests at heart,” he said. “Investors should expect to pay for good financial advice; it will save them thousands of dollars in the long run.”
I recommend starting your search at the Certified Financial Planner (CFP) Board’s website (letsmakeaplan.org). CFPs undergo rigorous training, agree to follow a strict ethical standard and demonstrate competence through stringent testing and years of experience. The site has a link enabling you to find a CFP in your area. A good CFP should be able to help you make investment choices that will maximize the likelihood of achieving everything you want for the remainder of your life.
Other research has found that people with naturally higher cognitive abilities (in particular math skills) may be able to continue to make good financial decisions longer than others. But at some point, we will all need help. And because we don’t know when our cognitive abilities will begin to decline (and, according to the study, won’t recognize it even after it starts happening), it’s a good idea to find someone you can trust to help you long before you reach an age where your financial literacy becomes suspect.