By Skyline On Friday, April 26 th, 2019 · In

FIELD NOTE: MAY 2019

COGNITIVE DECLINE

As the brain ages it decreases in size and functioning. After age 40 the brain decreases in volume by a rate of about 5% per decade until age 70, when it begins to deteriorate more quickly. The combination of cognition and experience peaks around age 50, at which point the loss of cerebral functioning begins to outweigh the benefits of experiential capital in task performance.

Investor Confidence and Financial Literacy by Age

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All retirees should prepare for the inevitability of cognitive decline. While the average independent investor underperforms the market by 1.56%, the elderly are even more vulnerable to underperformance. Loss of prefrontal cortex processing skills decreases the ability to make analytical choices and regulate emotional responses. In effect, loss aversion, or people’s tendency to avoid losses over acquiring equivalent gains, increases with age. During the 2008 recession, the mean number of stock reallocations made by senior investors was considerably higher than that of middle-aged investors. Investors aged 55-59 sold stock to decrease their equity portfolios by 7.71%, while investors aged 80-84 decreased their stock portfolios by 12.12%.

Financial literacy is another casualty of prefrontal cortex aging. After peaking at age 49, financial literacy test scores decline, eventually decreasing by 1% annually after the age of 60. In contrast, confidence in financial decision-making ability has a slight upward trend from age 60 onward. This curvilinear relationship between age and ability is echoed in competence for various financial tasks. For example, individuals are least likely to misestimate their house value when applying for a home loan at age 50. Controlling for FICO score, individuals are least likely to pay a credit card late fee at 51.9 years, take out a credit card cash advance at 54.8 years, and get the lowest auto loan APR at 49.6 years. 

Average Stock Reallocations During the 2008 Recession

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Apart from emotional regulation and financial literacy, cognitive decline also renders seniors vulnerable to robbery, coercion, scams, and identity theft. Financial abuse is estimated to cost five million elderly Americans $36.5 billion a year. Unfortunately, 58% of elderly financial abuse perpetrators are family members, and 17% are friends or neighbors, leaving many seniors unsuspecting of financial abuse.

Cognitive decline can be counteracted. Individuals who worked in mentally demanding occupations prior to retirement experienced slower cognitive decline after retirement. Diet, exercise, cognitive training, and social interaction can also mitigate the effects of aging. Our inevitable mental decline also makes a strong case for utilizing a financial advisor who embraces a fiduciary standard. Contact your Skyline advisor to discuss planning for cognitive decline.

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