Our ability to make important financial decisions declines with age. It is better to admit it. Your financial future may depend on it. A study from two Texas Tech professors shows an alarming decrease in financial awareness among Americans of retirement age.
No one wants to admit it but our ability to manage our money decreases as we age, but our confidence does not. It is important to be aware of this.
A study, form by professors Michael Finke and Sandra Huston of Texas Tech University and John Howe of the University of Michigan from the Department of Personal Financial Planning found our ability to make good financial decisions declines at a consistent rate as we age, and I am not talking in our 80s. The ability to answer basic financial questions decreases in line with the gradual erosion of memory and problem-solving abilities later in life.
Since fewer employers provide pensions than ever before, people are more dependent on their retirement savings coinciding with decreased abilities. What is more concerning, is older respondents didn’t report a loss of confidence in their ability to make financial decisions, a compounding issue.
“This was originally one of the most surprising and alarming findings from the study,” Finke said. “As we get older, our ability to answer basic financial questions that include knowledge, and the ability to apply that knowledge, gets worse. But we have no idea this is happening. It’s very like the research on driving skills. Since it happens so gradually, we’re not aware our abilities are getting worse over time.” It is like the frog put into the pot of room temperature water, warming slowly. He gets cooked before knowing he is in danger of doing so.
In “Old Age and the Decline of Financial Literacy,” published in the journal Management Science, the researchers found average financial literacy scores fell by half between the ages of 65 and 85. Characteristics like education, gender and wealth did not matter. They found older Americans were significantly less likely to correctly answer basic life insurance questions.
They report scores on problem-solving and memory can explain the age-related decline in financial literacy, which involves both the ability to remember financial terms and concepts and the ability to process this information. Though it is likely a natural part of aging, don’t minimize the issue.
Decreasing financial literacy opens the door to abuse from less principled advisers, numerous and always new financial scams. as well. Retirees whose financial literacy skills have declined may be particularly vulnerable to the sale of unsuitable investments.
One solution is to make sound decisions while you can. The more income certainty you can put in place that will last for the rest of your life, the less financial decisions you will need to make as you age. Retirement is the ‘spending’ years. The ‘earning’ years are over. Protecting principal and providing income is key.