How Aging Impacts the Financial Decisions of Older Adults

The effects of aging can undoubtedly impact your physical body and mental faculties later in life. But its toll on financial decision-making may be different than what one would presume, according to a recent study.

Published by the Center for Retirement Research at Boston College, the study, “How Does Aging Effect Financial Decision Making?” was led by Keith Jacks Gamble, an assistant professor of finance at DePaul University, and Rush University Medical Center in Chicago.

Its findings confirm that declining cognition, a common occurrence among individuals in their 80s, is associated with a significant decline in financial literacy. However, the study also finds that large declines in cognition and financial literacy have little effect on an elderly individual’s confidence in their financial knowledge, and essentially no effect on their confidence in managing their finances.

Using data from the Rush Memory and Aging Project (MAP), an ongoing study of aging adults in the Chicago metropolitan area initiated in 1997, researchers evaluated the effects of cognitive decline across several financial topics across 575 participants. 

The study excludes those diagnosed with dementia at the time of their first decision-making assessment.

Of the 575 adults without dementia who completed at least two assessments, the cognition scores of about 66% of participants declined. This group, which represented 377 individuals, was mostly female (78%), 83-years-old on average and reasonably well-educated at the time—an average of 15.2 years—of their first decision-making assessment. 

These characteristics were similar to participants whose cognition scores did not decline. While the scores of the 377 individuals with declining cognition fell an average of 0.29 standard deviation, the remaining 198 participants either remained the same or even increased.

The “decision-making assessment” measures participants’ responses across three elements of financial decision-making, including financial literacy, confidence and responsibility for the participant’s financial decisions.

The financial literacy assessment asks nine questions to test numeracy and financial knowledge. The numeracy portion ranges in difficulty from elementary calculations to comprehending compound interest. 

On the financial knowledge side, questions ask participants if they know what the initials of FDIC represent; and test whether they understand issues such as the value of paying off credit card debt; the relationship between bond prices and interest rates; and the historical differences between stock and bond returns. 

At the time of the initial assessment, participants whose cognition had declined answered about 70% of both the numeracy (69.6%) and financial knowledge (68.9%) questions correctly.

In terms of measuring confidence, the assessment asks participants to assess their overall self-confidence as well as their confidence in managing “day to day financial matters.” They respond on a scale from 1 to 10, where 1 is “not at all confident” and 10 is “extremely confident.”

Older adults whose cognition had declined were fairly confident when it comes to their finances. The average self-confidence measurement was 7.2, while confidence in financial knowledge averaged at 6.9, and confidence in managing finances scored at 8.1 for this group.

“The group was reasonable self-confident; reasonably confident in their financial knowledge; and even more confident in their ability to manage their finances,” said the study’s authors. “Consistent with this high degree of confidence, the vast majority indicated that they were primarily responsible for managing their finances.”

The responsibility portion asks participants who is primarily responsible for making their financial decisions, be it themselves, their spouse, child or someone else. Individuals are also asked whether or not they receive help with their finances, and if so, from whom. 

Of total adults who reported a decline in cognition at the time of their initial assessment, 87% said they are primarily responsible for their financial decisions, while 45% said they get help in this area. Less than 30% said they receive help from someone other than a spouse, such as an adult child or professional advisor (29%).

When estimating the effect of declining cognition on financial decsion-making, researchers calculated for a “one-unit” change in cognition.

In the group of MAP participants whose cognition declined, a one-unit decrease would reduce the average number of financial literacy questions answered correctly from 69.3%% to 61.5%.

Self-confidence dropped when estimated for the one-unit decline in cognition from 7.2 at the initial assessment to 6.5. Meanwhile, confidence in financial knowledge and managing one’s finances also decreased to 6.6 and 8.0.

On the subject of responsibility for financial decisions, the 87% of participants who said they are primarily responsible fell to just 55% after the one-unit decline in cognition.

Alternatively, older adults with declining cognition were more likely to get help with their finances. Whereas 45% said they receive help from a spouse, that increased to 61% in the years following the initial assessment. Similarly, those getting help from someone other than a spouse also rose from 29% at first to 46%.

“The result is not dementia,” the researchers wrote. “But it does suggest a significant decline in the ability to manage retirement savings, which is becoming increasingly important due to the decline in Social Security benefits — relative to pre-retirement income — and the shift from defined benefit pensions to 401(k)s.”

Going back to the group of MAP participants whose cognition scores declined, the average drop was 0.29 standard deviation. Though this is much less than a one-unit change, the study notes that this occurred in just two to three years. 

“The cognitive decline that comes with age typically continues over many years,” the researchers wrote. “Thus a significant number of elderly individuals may experience something akin to such a one-unit decline in cognition.”

View a brief of the study.

Written by Jason Oliva

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