Regardless of gender or education level, most people become considerably less literate when it comes to handling money issues after age 60, according to a recent study.
Test scores measuring knowledge of investments, insurance and credit issues fell by slightly more than two percentage points each year after age 60, reports Texas Tech University professor Michael Finke, co-author of the study entitled Old Age and the Decline in Financial Literacy.
Finke and his team found that financial literacy peaks in the late 40s and that there was a statistically strong and steady decline in financial literacy among older respondents. What’s worse, however, is that many study subjects’ confidence in their financial decision-making abilities actually seemed to rise with age.
This contradiction spells trouble for both clients and financial advisors alike because this age cohort already represents about 15% of Canada’s population and controls a significant portion of the country’s financial wealth.
Cognitive performance improves from youth to middle age before beginning a steady decline, reports Harvard University’s David Laibson in a paper entitled The Age of Reason: Financial Decisions Over the Life Cycle. Wisdom may well rise with age, he says, but “fluid intelligence” – the ability to handle abstract problems – doesn’t. These two qualities move in opposite directions, with the optimal balance generally occurring in mid-life.
Older people were twice as likely as those in their late 30s to jump on a “teaser rate” on a credit card and have more trouble estimating the value of their homes, according to Laibson’s research.
As we grow older, our brain gets more impulsive and more easily swayed by appeals to positive emotions, which helps to explain why “get rich quick” con artists prey on the elderly. The reason, brain researchers suggest, is that many older people stop making decisions through logical analysis – using the so-called “left side” of the brain. Instead, people become much more “right brain” in the way that they process information as they age, becoming swayed less by numbers and logic than they are by feelings and passions.
As a result, it’s important that your clients acknowledge that their ability to make financial decisions may decline after age 60. Unfortunately, they may not know that it’s happening when it does, says Finke, who points to the similarities between driving and making financial decisions.
Studies of driving show that older people generally don’t sense any progressive drop-off in their driving abilities. But when shown evidence that their driving skills have diminished, they start to accept the truth and modify their driving habits accordingly.
Similarly, Finke says, recognition of diminished investment skills may require more emphasis on such financial products as annuities or passive investment vehicles that automatically rebalance, as well as on health insurance.
Recognizing this decline, he adds, also will increase demand for services such as financial planning, accounting and legal assistance to substitute for reduced decision-making ability.
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