There are many economic milestones in life – buying your home, paying off your mortgage, leaving employment – which take place on one particular day.
These are the financial changes with which we easily identify.
It’s more difficult to decide when to act when gradual changes are taking place, and particularly when we would rather avoid thinking about those changes.
Longevity is one of the greatest achievements of the modern era. But, it’s a fact that, as we age, we often experience cognitive decline.
A Harvard University study demonstrated how numeracy declines with age, whilst Finke, Howe and Hutson found that financial literacy declines by 1% per year from the age of 60.
However, we all reach the age of 60 with differing financial literacy skills, so there can’t be a one size fits all rule for what to do.
Barclays reports that its oldest online banking customer is aged 104!
Longevity makes this situation worse – the longer you live, the longer you have for your financial capacity to reduce; and affluent individuals tend to live longer than the average.
What is worrying is that the same study found that people didn’t report a loss of confidence in their ability to make financial decisions, perhaps because of the slow pace of the decline.
And modern retirement assumes that we remain able to manage our own finances.
Our pensions and other retirement resources are increasingly linked with shares, property and other assets, and then intertwined with complex tax regulations.
The combination of overconfidence, reducing ability and increased complexity is, of course, dangerous, making us more susceptible to fraud as well as poor financial decisions. These mistakes can be disastrous for others when the family finances are managed by the husband or wife alone.
Research has shown that the decline in financial literacy can be slowed – by not smoking, being physically fit and continuing to challenge your brain – but it cannot be stopped altogether.
Studies have shown that 50% of the variation in thinking skills in older age is explained by IQ at age 11, so it may be that we can only make marginal improvements. However, the wisdom of experience cannot be ignored, supporting us as our financial literacy reduces.
There are some solutions to the problem of cognitive decline on which researchers generally agree:
Form a relationship with trusted advisers.
By forming a relationship before it is necessary, you have the chance to ascertain if the advisers are right for you.
It may make sense to have more than one trusted adviser – perhaps a lawyer as well as a Financial Planner.
Non-professional advisers, such as family members or close friends, can also work alongside the professionals, as they may bring a clear understanding of your wishes.
Agree a written Financial Plan for retirement, covering anticipated expenditure and income, as well as how your resources should be used to achieve your objectives.
Establish powers of attorney.
These allow somebody else to manage your finance and health needs, but they are complex and require you to make some difficult choices. It is better to deal with these in the early part of your retirement.
But the best advice is to do all of these things before you need to – don’t wait till you make a mistake.
As you age you will need more support.
Forming a good relationship with a Financial Planner will give you peace of mind and freedom to get on with your life.
