We are frequently asked to assist clients with financial planning for their retirement or the payment of long-term care.
Unfortunately, we find that clients have often made significant mistakes in their investment planning. Having a clear-cut, simple financial plan in place is a good idea for everyone, regardless of age. However, a growing body of research suggests simplicity takes on an added urgency as we move into our 70’s when our ability to make wise investment choices begins to decline.
According to a Wall Street Journal article, increased age often causes many seniors to make poor financial decisions. According to the article, about one-half of individuals in their 80’s experience some dementia or cognitive decline. The article cites research into decision-making skills which suggests that they begin to slip after the age of 70 and suffer more rapid declines after the age of 75.
Another study discussed in the article examined the finding of four economists who had reviewed bank data on several types of loan transactions. They found that individuals in their 20’s and those over the age of 70 years were much more likely than those in middle age to make financial mistakes, such as accepting higher-than-necessary rates on home equity loans or owing fees for paying a credit card late or going over a credit limit. The economists attributed the mistakes of younger individuals to inexperience, but those of older individuals to declining decision-making abilities. The economists noted that this is especially troublesome because older individuals have much larger assets and thus have much more at stake.
Since it’s virtually impossible to know what challenges we may face as we age, the best defense against poor decisions or fraud is a good offense – a simple, easy-to-manage financial plan put in place well before age 75. The article suggests the following steps to consider:
Simplify your investments. Consider doing away with individual stocks in favor of easier choices like index mutual funds. Avoid alternative investments and private partnerships that might be hard to sell. Many investment firms will calculate and automatically send you mandatory IRA distributions and offer services that, for a fee, automatically rebalance your investments.
Consolidate accounts. Many of us have a dozen or more banking and brokerage accounts or certificates of deposits at several banks. Consider reducing the number of investments you must monitor by consolidating your accounts. Consolidation makes keeping track of your money much easier.
Get your paperwork in order. Although your Social Security payments are probably direct-deposited and you may have already designated someone to make decisions for you if you become incapacitated, you should still locate and organize all important documents, such as account statements and stock certificates.
Eliminate debt. A Federal Reserve study of consumer finances found that almost one-half of households headed by individuals 64 to 74 years of age had a mortgage, and 37 percent carried credit card balances. Paying off these debts will free up cash and lesson the worry of forgetting to pay bills.