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Facing the Reality of Cognitive Decline

'Cognitive decline is another risk, so let's plan for it just like we're planning for inflation or investment losses.'

You help your clients manage many types of risk. But have you had the difficult talk about cognitive decline?

A growing body of evidence points to the unpleasant fact that our ability to manage our finances declines with age. That’s not to say we’ll all suffer from dementia. But even normal aging reduces the ability to make optimal financial choices—even though our confidence in our own financial decision-making remains high well into old age.

“It’s not that we're necessarily losing all of our marbles,” says Steve Vernon, a research scholar at the Stanford Center on Longevity. “But we are losing a marble or two over time—so the question is, how do we plan for that?”

The Stanford Center teamed up recently with researchers at the University of Minnesota to create an online tool that aims to help answer that question. Called the Thinking Ahead Roadmap: A Guide for Keeping Your Money Safe as You Age, it is an educational and decision-making resource aimed at helping people get a plan in place.

The Roadmap, a free resource, created with funding from AARP, walks users through key steps, including how to choose a trusted financial advocate and organize financial information, how to have conversations about planning, and how to think about shifting money management to an advocate when the time is right.

The need to plan for this risk is great—and it’s something that should be on the radar screen of planners. A Federal Reserve study found that only a quarter of U.S. adults had appointed an agent under power of attorney, 14% made only informal plans for someone to act on their behalf, and nearly half (46%) had made no arrangements at all. A Merrill Lynch/Age Wave survey found that just 18% of adults age 55 and older had a will, an advance directive and a durable power of attorney.

Consider this type of planning as a form of insurance—the problem might occur, and it might not—but if it does, you’re ready.

The Roadmap provides an online tool for getting a conversation started on these issues with clients—something Vernon regards as a critical first step. “Planners should get educated enough on these issues to at least bring them to the attention of clients,” he says.

“Identifying this as a risk can also help build trust,” he says. “You’re already talking with clients about all the other retirement planning risks, like longevity, inflation and health care. Cognitive decline is another risk, so let's plan for it just like we're planning for inflation or investment losses.”

One especially tricky problem: Many people remain highly confident in their ability to manage money, credit, investments and insurance, even as cognitive ability steadily declines. One study that measured confidence at various age groups against the percent who answered financial questions correctly found a widening gap, especially after age 70.

“Even as our ability to answer questions correctly falls, our confidence just stays at a very high level all the way into our 90s,” Vernon says.

The goal is to put strategies in place to protect clients while they are still healthy and have strong cognitive ability. “When you read all the articles and books on this topic, it's always targeting the adult children” Vernon says. “When is it time to step in and take over Mom and Dad's finances and clean up the messes that have happened? First, let’s prevent the mess from happening—and if you address this while the senior is still in charge, they can make decisions about who is going to take over for them, rather than letting it somehow just happen.”

One of the most important steps is to identify someone who can assist with day-to-day finances—everything from paying the bills to maintaining relationships with banks, insurance and investment firms, and managing housing and real estate. This helps reduce the risk of both scam victimization and routine financial missteps, such as failing to pay an important utility or insurance bill.

The report also recommends keeping assets in fiduciary-protected accounts, automating income via optimization of Social Security benefits or annuity purchases, and using two-factor authentication to protect online accounts.

Vernon adds account consolidation to that list. “Many people have 10 or more IRA or 401(k) accounts, so it’s important to get those consolidated into one place where they can be managed easily.”

The researchers conducted interviews and focus groups with the aim of identifying barriers to this type of planning. Those sessions revealed issues including denial about death and disability by individuals and their families, lack of knowledge about advance financial care planning, privacy concerns, and dysfunctional or complex family dynamics.

The research also pointed toward ways to motivate people to take action.

“The biggest motivating factor that we found was the peace of mind this process can create,” Vernon says. “It can really reduce the burden on your adult children or other families—and avoid creating conflict within families.”

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