Financial Decision-Making in Later Years

The Center for Retirement Research at Boston College has released a report, How Does Aging Affect Financial Decision Making? The introduction explains

 With the shift from defined benefit pensions to 401(k)plans, the welfare of retirees increasingly depends on their ability to make sound financial decisions. This situation has raised concerns that the cognitive decline that comes with age could compromise the elderly’s decision-making ability and thereby their financial well-being. This brief, based on a recent study,1 addresses this issue using a unique dataset that follows a group of elderly individuals over time. 

 The report is divided into four parts: literature review, data, analysis and conclusion. The conclusion paints an interesting picture

The findings confirm that declining cognition, a common occurrence among individuals in their 80s, is associated with a significant decline in financial literacy. The study also finds that large declines in cognition and financial literacy have little effect on an elderly individual’s confidence in their financial knowledge, and essentially no effect on their confidence in managing their finances. Individuals with declining cognition are more likely to get help with their finances. But the study finds that over half of all elderly individuals with significant declines in cognition get no help outside of a spouse. Given the increasing dependence of retirees on 401(k)/IRA savings, cognitive decline will likely have an increas-ingly significant adverse effect on the well-being of the elderly.