How does your retirement plan account for your own cognitive decline?

Our financial lives throw up a lot of events that only occur once for each individual – a few big changes like retirement, alongside many less significant opportunities and problems. Working with someone who has seen these situations hundreds of times, and who has been handed down received wisdom about how to deal with them, should help to steer you in the right direction and avoid costly mistakes.

One of the challenges of retirement is that the declining cognitive skills associated with aging make it increasingly difficult people to manage their investment and withdrawal decisions on their own. It’s common, in many couples, for one person to handle money matters, and this can make the other person especially vulnerable and potentially liable to making mistakes if they have to take on the role of family financial manager. Developing a strong relationship with a trusted financial planner can help not only with the declining cognitive ability of the person who runs the couple’s finances, but also with the decision making for the partner with less experience of financial matters.

In terms of cognitive decline, a research article by Michael Finke, John Howe, and Sandra Huston called “Old Age and the Decline in Financial Literacy” outlined the situation well. They provided a financial literacy test to older populations and found that financial literacy tends to decline by about 1% per year after age sixty, but financial confidence remains the same.

Other research from David Laibson at Harvard University has also revealed reduced numeracy with age. It becomes harder to perform basic arithmetic calculations and understand the nature of risk, not to mention answering questions such as which number is smaller: 1/100 or 1/1000? There is a good, two question, test which you can use to test your risk literacy, at If you complete the test, you’ll be helping with academic research too!

Declining abilities to do financial calculations and other types of cognitive impairment make it increasingly difficult to manage a complex investment and withdrawal strategy as you age.

However, as the chart shows (taken from “Old Age and the Decline in Financial Literacy.” Michael S. Finke, John S. Howe, and Sandra J. Huston. 2011), our declining financial literacy is not accompanied by a decline in our self-confidence, and this is a recipe for vulnerability.

This means that it is important to plan ahead and make some decisions before cognitive impairment has an impact.

This includes working with a regulated financial planning firm; nowadays, regulated firms like Sussex Retirement Planning are required, not only, to be able to detect the signs of vulnerability, but also, to take appropriate action to help their clients deal with the impact.

Vulnerability isn’t only caused by cognitive impairment – there are plenty of situations that can give rise to a person becoming vulnerable, sometimes temporarily (such as illness or the need for an operation). Sadly, it seems that fraudsters are particularly successful when they identify a vulnerability.

It can be hard to accept that a natural consequence of aging is a decline in our physical abilities. But we all know people who didn’t recognise this and injured themselves as a result (if you are reading this and thinking “does he mean me?”, the answer is probably “yes”!). It’s probably even harder to accept that a decline in our cognitive ability is a further natural consequence of aging; however, the results of not recognising this can be financially disastrous.

We think it’s important for you to get on and enjoy your retirement. We think that most people can only do so if they have developed a close relationship with a trusted retirement planning expert and the earlier they do so, the better.

Philip Wise |

Managing Director and Chartered Financial Planner

This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.

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