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What We Know About Financial Decisions and the Aging Brain

Research looks at how aging affects financial decision-making.

Key points

  • Normal aging leads to declines in cognitive abilities that affect financial decision-making.
  • Cognitive declines related to dementia also lead to poor financial decisions.
  • Medical providers and caregivers can look out for signs that older adults are making poor financial decisions.
 Graphicroyalty/Adobe Stock
Source: Graphicroyalty/Adobe Stock

As people age, some of their cognitive abilities naturally decline. In fact, some skills, such as working memory, peak at age 30 and then begin a gradual waning that is considered a normal part aging. In addition, about 10 percent of people 65 and older develop specific medical conditions that lead to cognitive impairment.

A substantial body of research takes a careful look at how changes in cognitive function during aging—those both normal and those associated with dementia—affect financial decision-making.

In a world of online stock trading and scam marketing calls, it’s important for older adults to be able to evaluate their options and understand the risks and benefits of their financial decisions. Because companies have shifted from providing a pension to offering 401(k)s, most of today’s retirees are managing their own retirement savings.

In one study, researchers calculated the age when people are least likely to make financial mistakes: 53. The study used a model of psychological testing that found younger financial managers make poorer decisions because, while they have stronger cognitive abilities, they have less experience; older financial managers lose some cognitive function but have the benefit of experience to guide them.

Clearly, people manage their own finances well past that prime age of 53. For many, their abilities begin to decline more noticeably in their 70s and 80s.

A 2015 study found that normal decreases in cognition due to aging lead to a decrease in financial literacy. Researchers found that as participants’ cognitive skills declined, so did their self-confidence. But this decline in self-confidence generally did not translate into a lack of confidence in financial skills; most people thought they could handle their own finances just as well as before. Nevertheless, those experiencing decreases in cognition were more likely to get help with financial decisions. Still, many participants experiencing significant drops in cognition did not get help with their finances.

Older adults who develop dementia struggle even more. A systematic review of 42 studies published last year evaluated financial decision-making across the continuum from healthy aging to dementia. It found, not surprisingly, that older adults without dementia made better financial decisions than those who had developed dementia. Participants with more severe cognitive impairments, such as Alzheimer’s disease, made poorer decisions compared to those with mild cognitive impairments.

Mark Lachs, co-chief of geriatrics and palliative medicine at Weill Cornell Medical College, coined the term age-associated financial vulnerability as a clinical issue that medical professionals should look out for among older patients. He leads a research project trying to end financial abuse among older adults. His laboratory has created a new screening tool to help medical providers who work with older adults identify patients prone to making poor financial decisions. The idea is to determine whether a person understands that risks exist, that they might be at risk, and what could be done to avoid the risk.

He also offers some practical advice for anyone keeping an eye on an older relative or loved one, including those experiencing difficulty with everyday math, being late on or missing payments, and understanding basic financial concepts, such as interest rates and minimum balances.

The take-home message: Both normal aging and dementia can impair older people’s ability to manage their finances. Being aware of these issues and paying attention to the older adults in your life is the first step to identifying and preventing potential problems.

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