Smart Money Moves to Make While You’re Still Mentally Sharp

Key Takeaways:

Your ability to make smart financial decisions may start to decline sooner than you think.
Have important conversations with family and trusted advisors about your wants and needs for your senior years as soon as possible
Get legal documents in order and updated while you’re still considered “of sound mind.”

As we age, we tend to lose some of our cognitive abilities—and that, in turn, can cause us to make financial decisions that aren’t in our best interests.

Commonly, people experience a degradation of financial decision-making abilities and “mental sharpness” beginning sometime in their 60s or 70s. When you consider that there are some 10,000 Americans turning 65 every day and all the baby boomers will hit that age by 2030, the issue of cognitive decline—and its potential impact on wealth—is a truly serious one many of us may need to contend with.

Your best bet: Don’t panic. There are steps you can take right now that can potentially set you up for success even if you begin to experience some form of cognitive impairment that might otherwise threaten your financial future.

Losing our edge

Some facts about aging are quite sobering. For example, currently there are some 16 million Americans with cognitive impairment, according to the U.S. Centers for Disease Control and Prevention—while more than half of the U.S. population over age 85 suffers from some level of cognitive impairment, according to research by the Center for Retirement Research at Boston College.

What’s more, plenty of academic research reveals that our ability to be good stewards of our wealth is likely to decline as we reach the 60-plus and 70-plus clubs:

Financial literacy scores decline consistently after age 60, with the annual rate of decline being both significant and similar among all the cohorts studied—which included men, stockowners and people with a college degree.
Financial decision-making peaks for most of us in our early-to-mid 50s, while investing skills can start to decline sharply in our 60s and 70s.
Bankruptcy filings rose fastest among those age 65 and older.
Even mild declines in cognitive performance reveal evidence of diminished financial capabilities.

Getting set up for success

Of course, you don’t want even mild cognitive issues to cloud your judgment and cause you to make poor financial moves. The good news: There are numerous steps you can consider taking that can potentially help safeguard your assets from mental mistakes you may one day make. For example:

1. Start early.

The ideal time to be thinking about how to protect your assets from the impact of cognitive decline is well in advance of when the need arises. Based on the data above, that means during our late 40s or early 50s for most of us—hopefully before we’re staring down dementia or another type of cognitive health crisis. The fact is, you can’t make a legally binding will or set up other legal documents (like power of attorney and trusts) unless you are considered to be “of sound mind”—which essentially means you understand the consequences of your decisions and you act of your own free will. If you wait until cognitive decline has clearly taken root, your ability to put legal documents and strategies in place may be denied.

2. Simplify your financial life.

Many experts suggest making it easier to keep track of your finances by consolidating disparate accounts under one roof. For example, you might place most or all of your investments with one trusted financial advisor, or merge multiple bank accounts into one. Such “clutter reduction” not only will help you, but may also help if another person—such as a family member or advisor—needs to step in to assist you down the road. Additionally, you might consider emphasizing investments and other financial solutions that are relatively straightforward and easy to understand, as our ability to make complex decisions tends to fade as we age.

3. Have clarifying conversations with family and advisors.

Sit down with the people you’d want to help you navigate through life if your capacity were to become diminished. Identify who will help you make sensible financial, health care and other decisions if there’s a serious mental or physical health issue. Discuss your wants, needs and values with those people. If your future caregivers and decision-makers know today about your goals as well as how you want to be helped in the future, they can prepare themselves to honor your wishes. As you dive deeper into the topic, come up with a caretaking plan that spells out when you want a family member, advisor or other trusted person to take the reins. Later, as you’ll see below, you can formalize your wish list and make it all legal.

Important: This may be a good time to open up and share some aspects of your financial situation, strategies and plans with your heirs. That way, they understand the thinking behind key financial decisions you’ve made to date. You might even consider allowing them to monitor some of your accounts through a financial portal so they can be watchful for transfers or withdrawals that look suspicious.

4. Set up—or review—important legal documents.

Here’s where your intentions meet up with execution. Some of the key documents you should consider having in place in the event that you experience serious physical or cognitive decline are obvious—such as a will. But others are too often overlooked or never updated, including:

Durable power of attorney for finances. This allows you to appoint one or more people to manage your financial assets if necessary. You can give that person authority to do so immediately, or have the authorization begin once one or more specific provisions are met (such as a doctor stating that you need assistance). Regardless, consider introducing the person to your wealth manager, accountant and other financial professionals before there’s a need for them to work together on your behalf. Without a durable power of attorney, no one can legally handle key financial duties like paying bills and making decisions about investment accounts. Instead, your family would have to go through a lengthy (and perhaps expensive) court process.
Health care directives. These documents spell out clear directions to family members and physicians about preferred health decisions and related matters—effectively removing family from having to make life-and-death choices about you without any guidance. One example is a living will, which formalizes your wishes for end-of-life care (surgery, ventilators, feeding tubes and the like). Another is a health care power of attorney, which gives someone of your choosing the authority to access your medical records and make medical decisions on your behalf if you’re unable to do so.
Living trusts. A revocable living trust can allow you to name a successor trustee who can take control of the assets in the trust if you become mentally or physically incapacitated. The trustee can invest the assets as well as distribute money from the trust to benefit you (as the grantor) or other beneficiaries, such as members of your family. Say, for example, that your daughter will be your caregiver. The trust could potentially authorize payments to her. And, of course, with a trust your family won’t have to go through the probate process after you’re gone.

5. Compile key documents and other important financial information.

If someone eventually needs to help in making financial decisions on your behalf, it’s best to make it easy for them to step into that role. To that end, start compiling a comprehensive inventory of your key financial information. You can create a digital file or folder, or keep hard copies in a specific spot like a desk drawer. Whatever route you choose, tell someone you trust—ideally the person who is on board with helping you if needed, be it a family member, friend or attorney—the location of the paperwork and other details.

The specific information you compile will depend on the details of your financial situation but should likely include:

Assets (details for checking accounts, investment accounts, annuities, business interests, real estate)
Beneficiary designations on qualified plans and IRAs
Liabilities (mortgages, credit cards, recurring expenses)
Insurance (life, long-term care, disability, umbrella, buy-sell agreement)
Contact information for key people/advisors (accountant, wealth manager, lawyer, physician)
Digital information (IDs, passwords and PINs for financial-related websites you have accounts with, such as online banks and brokerage firms)
Location of your most up-to-date will with an original signature, durable power of attorney, deed for house, car title and any safe deposit boxes/keys
Location of birth certificate and certificates of marriage, divorce, citizenship, adoption, etc.
Copies of any business succession plans and the location of ownership-related documentation (for entrepreneurs)

Conclusion

As long as we’re alive, we’re going to get older. And the unpleasant truth is that many of us will likely suffer some form of cognitive decline, which could range from simple forgetfulness to full-blown Alzheimer’s. By first being honest with ourselves about this possible outcome and then taking action steps aimed at minimizing the potential for making wealth-erasing mental mistakes—and working in partnership with family and trusted advisors to do so—we can seek to protect the assets we’ve worked so hard to build and grow over our lives.