Financial Decision-Making in an Aging World

The risk of becoming more vulnerable to financial abuse as we get older can pose a significant threat to our retirement security. Larry Swedroe explores research into the scope of the problem, and then offers some steps to help guard against it.

The World Health Organization reports that by 2050, 2 billion people (22% of the population) will be age 60 and older, up from 605 million (11% of the population) in 2000. Older adults must make important, and often irreversible, decisions that impact the rest of their lives.

Examples include when to take Social Security and pension benefits, whether to buy long-term care insurance, how to most efficiently draw down savings and whether to annuitize assets.

Unfortunately, while advances in wealth and medical science have led to rising life expectancies, longer lives create the risks of running out of financial assets sufficient to support a minimally acceptable life style and cognitive impairment, which makes us more susceptible to becoming the victim of elder abuse.

What The Research Says

As described in the book “Financial Decision Making and Retirement Security in an Aging World,” the latest volume in the Pension Research Council series, the 2014 study “Financial Exploitation in the Elderly Consumer Context” found that the annual prevalence of elder financial abuse among those age 60+ was about 14% in Florida and Arizona.

Age-related declines in fluid cognitive skills begin to emerge in our 20s—the longer we live, the greater our susceptibility to cognitive impairment. It’s been estimated that today half of those in their 80s have dementia or some milder form of cognitive impairment. Yet as we age, we are still responsible for managing our wealth, health care costs, taxes, insurance and estate plans.

As explained in the book, Wandi Bruine de Bruin, professor of behavioral decision-making at Leeds University, found that older adults make more mistakes when asked to apply decision rules to choose between products, and that as the number of options increases and decisions become more difficult, they are less likely to make the optimal choice.

Also according to the book, in his review of the research on challenges for financial decision-making at older ages, Middle Tennessee State professor Keith Jacks Gamble found: a decrease in cognition is a significant predictor of a decrease in financial literacy among seniors; older investors’ investment selections are less skillful; the prevalence of suboptimal credit decisions increased after age 53; and bankruptcy filings among those age 65 and older constituted the fastest-growing demographic group.

Importantly, he found that while the research shows that a decrease in cognitive skills predicts a decline in self-confidence, this is not necessarily true when it comes to financial decisions—the elderly either don’t recognize this or are reluctant to admit it (which prevents them from seeking help from a trusted advisor). Gamble found that even among those experiencing cognitive declines, about half get no help with their decisions despite the fact that they are likely to benefit from trustworthy, knowledgeable advice.

Susceptibility To Fraud, Elder Abuse

The loss of cognitive skills puts the elderly at greater risk of being susceptible to fraud. Because of that, they are more likely to be targets. According to the 2015 True Link Financial report on Financial Elder Abuse, the amount stolen from elders each year in the U.S. is more than $36 billion.

This includes not only outright theft by unscrupulous people in their lives, and online predators who are after them, but also other kinds of more subtle abuse. Research demonstrates that no one is immune from financial manipulation, regardless of their education, sophistication or experience in financial matters.

True Link found that a significant number of victims are younger seniors, college educated and not living in isolation—and they lost more to abuse than those who were older, less educated and isolated. And the estimate of $36 billion in losses is almost certainly dramatically understated because the elderly are far less likely to report abuse, either due to embarrassment or because the abuse was by a family member, such as a child.

The FINRA Foundation conducted a fraud survey in 2012 and found that those over 65 were targeted more often and were more likely to lose money when targeted compared to those in their 40s. In addition, the 2012 Senior Financial Exploitation Study found that 56% of certified financial planners had an older client who had been financially exploited, with an average loss of about $50,000.

Compounding the problem is that being a victim of fraud causes an increase in risk-taking (to try to make up for the loss), like the casino gambler who keeps playing until he breaks even. In fact, fraud victims report an increased assessment of their lifetime willingness to take on financial risk relative to nonvictims. That in turn can lead to further problems from which it may be impossible to recover.


Thoughts of retirement can be dreams of being free of job responsibilities and enjoying travel, leisure activity and having fun. We look forward to having time to do the things we didn’t have time to do. Our thoughts usually do not include fear that someone is going to rip us off. Unfortunately, financial abuse does happen, even to the smartest people.

Most of us do not want to face the fact that, over time, we may lose our mental acuity, creating the potential for financial abuse. However, declining mental sharpness is inevitable for many. That makes us vulnerable to financial abuse. Even if you do not suffer any decline in mental sharpness, there is no guarantee you will be untouched by those seeking to exploit you.

Determined, professional thieves know that many seniors have nest eggs that can be stolen. Educated and powerful people can be taken advantage of and manipulated right along with those who lack these advantages. No one is immune.

Elder expert and author Carolyn Rosenblatt offers the following checklist of warning signs of cognitive impairment (which create the risk of financial abuse):

1. It appears to trusted others that you are no longer able to process simple concepts.

2. You appear to be forgetful, with short-term memory loss.

3. You appear unable to recognize or appreciate the consequences of financial decisions.

4. You make any decisions that are inconsistent with your long-held goals, investment philosophy or commitments.

5. You demonstrate erratic behavior.

6. You refuse to follow appropriate investment advice, which you have generally accepted in the past.

7. You seem to others to be paranoid about someone taking your money or missing funds that are not missing.

8. You lose the ability to understand recently completed financial transactions.

9. You appear in any way to be disoriented, get lost in familiar places, such as finding your way home, or you forget where you are.

10. You forget to groom, bathe or take basic care of your physical needs.

If you (or a loved one) are experiencing these signs, it’s time to seek help. You do not want to wait until after the damage is done.

Rosenblatt also offers the following 10-point smart retirees’ checklist that generally covers many of the bases of how to help your family and yourself be best prepared for things you need to manage in this phase of life and avoid abuse. The bottom line here is transparency and open communication.

1. Decide with whom you want to communicate about your future. Set a date and get together.

2. Have a signed, notarized durable power of attorney.

3. Have a signed advance health care directive.

4. Make a list of all bank accounts, passwords, hard drive backup, investment records and financial planning you have done, and provide contact information. Provide written permission to your loved ones to talk with your lawyer, accountant and financial planner.

5. Make a list of all insurance policies, including life, disability, health, property,  earthquake, and anything else you own that will protect your heirs.

6. Make a copy of your mortgage statement, any other loans, financial statements and bank statements. Keep them in one place. Update when changes are made.

7. List your physicians, care providers and medications. Give written permission  for your loved ones to speak with your doctors.

8. Put in writing your wishes for burial or disposition of your remains.

9. Update your will and/or trust with a local attorney. Laws change and documents need to be up-to-date in your state.

10. Have a family meeting to give items 2 through 9 to your loved ones and explain them.

If you or your loved ones don’t have such a plan already in place, I hope you take this as a call to action.

This commentary originally appeared November 12 on

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