COPING WITH FINANCIAL complexity as we age can lead to major problems—and denial isn’t the solution. What to do? One HumbleDollar commenter, in response to a recent article, recommended a book, What to Do When I Get Stupid, by economist Lewis Mandell.
The book has two main themes. First, we should try to create a guaranteed stream of income, preferably one that’s linked to inflation, to cover our core retirement expenses. This could be a combination of Social Security, pension income, inflation-indexed Treasurys, annuities and possibly a reverse mortgage.
Second, we should make our finances as “stupid-proof” as possible to prevent disastrous investing or spending mistakes that could derail our retirement. Mandell presents evidence that, on average, our capability to make financial decisions involving credit peaks at age 53. Our decision-making ability with investments peaks later, at age 70.
It seems that, as we age, we gain experience, knowledge and wisdom. But this is somewhat offset by a decrease in our fluid intelligence, which is the ability to think abstractly and deal with complex information. Fluid intelligence decreases with age, just as vision and hearing do. The rate of decline is specific to the individual but tends to steepen after 70. We would all do well to consider the possibility of cognitive decline.
Mandell gives several specific recommendations for handling these concerns. In addition to the two already covered, here are four suggestions that stood out for me:
I’m sure many HumbleDollar readers have helped older friends or family members manage their finances in their later years. Helping my mother-in-law and my wife’s Aunt Pat was a memorable and fulfilling experience for me. It forced me to ratchet up my knowledge of financial planning, eventually leading me to complete the Certified Financial Planner and Retirement Income Certified Professional programs.
Both women were quite competent money managers through most of their lives. They lived within their means, saved regularly, invested carefully and organized their finances to an amazing degree. Sadly, in their early 80s, cognitive decline robbed them of their interest in managing their affairs and their ability to do so.
One early warning sign was the growing stack of unopened Vanguard Group statements at my mother-in-law’s house. She had been one of the most organized people I knew. The fact that she didn’t immediately open, check and file her statements was a red flag.
A few years ago, as part of my AARP TaxAide volunteer service, I prepared the tax return of a retired teacher. She had a large number of 1099-INT statements. None of them was particularly large, most well under $100. When I asked why she had so many, she explained that one of her retirement activities was researching yields on certificates of deposit. When she found one she liked, she would drive to that bank’s closest branch and open a new account. She did this all over southeast Pennsylvania.
She was well organized, so preparing her return was time-consuming but not technically difficult. Still, I worry that, as she ages, the complexity of all those certificates of deposit may become more than she can handle. More important, she said she didn’t have anyone to take over her finances if she became incapacitated.
Many of us want to simplify our financial life in retirement. Chasing higher yields may be financially rewarding, but it comes at the expense of increased complexity. We all have to decide how we want to balance the tradeoff between simplicity and return. It’s important to think about this early, and honestly, and then decide what makes sense for your situation.
Perhaps, if you need help, you have someone in your life with the skill and inclination to manage a complex financial situation. But you should also consider whether this is a responsibility you want someone else to assume—or whether you should simplify now, while you still have the mental wherewithal to do so.
Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.