“Once we know our weaknesses, they cease to do us any harm”. So said Georg Lichtenberg, the physicist who is better known for coming up with the standardised paper size system (A4, A3 etc.) and his scrapbooks, than for his contribution to physics.
We all have a weakness in retirement, but few of us are comfortable admitting to it, unless or until it causes us financial harm. This weakness has been studied in detail in detail by professors Michael Finke and Sandra Huston of Texas Tech University and John Howe of the University of Michigan.
Their study shows our ability to manage money decreases at a consistent rate after we reach retirement age, but our confidence in our ability to make good financial decisions stays the same. Finke said. “As we get older, our ability to answer basic financial questions that include knowledge, and the ability to apply that knowledge, gets worse. But we have no idea this is happening.”
The researchers found average financial literacy scores fell by half between the ages of 65 and 85. The rate of decline was not affected by personal characteristics like education, gender and wealth.
The gap between our decreasing financial literacy and our confidence in our financial decision-making powers is dangerous. This confidence gap means that not only are retirees more likely to make financial mistakes, but also they become increasingly vulnerable to financial fraudsters.

It can be difficult to accept that our financial decision-making powers may be on the wane, but recognising that this is not unusual can be the first step in protecting our retirement finances. The academic study found a consistent linear decline in average financial literacy scores of about 1 percentage point per year among the over 60s. We may want to try to buck the trend, but, even if we do, it’s better to recognise that it may affect us.
We think that there are three actions you should take to avoid making bad decisions as a result of the confidence gap:
- Form a relationship with trusted advisers. By forming a relationship before it is necessary, you have the chance to ascertain if the advisers are right for you. It may make sense to have more than one trusted adviser – perhaps a lawyer as well as a financial planner. Non-professional advisers, such as family members or close friends, can also work alongside the professionals, as they may bring a clear understanding of your wishes.
- Agree a written financial plan for retirement, covering anticipated expenditure and income, as well as how your resources should be used to achieve your objectives.
- Set up powers of attorney. This allows somebody else to manage your finance and health needs, but they are complex and require you to make some difficult choices. It is better to deal with these in the early part of your retirement.
But the best advice is to do all of these things before you need to – don’t wait till you make a mistake. As you age you will need more support. Forming a good relationship with a financial planner will give you peace of mind and freedom to get on with your life.
Philip Wise | philip@sussexretirement.co.uk
Managing Director and Chartered Financial Planner