Brain Drain

Most of us avoid thinking about mental or cognitive decline. But as we age, planning for later life cognitive conditions may be as important as planning for careers, families or saving for retirement.

According to the Alzheimer Society of Canada, there were 564,000 people estimated to be living with dementia in Canada in 2016. By 2031 this number is expected to increase to 937,000 with over 65% being women.

So how does age-related cognitive decline impact your ability to make investment decisions?

Many researchers believe that human intelligence consists of an array of cognitive skills, which are commonly divided into two categories. The first, fluid intelligence, is our ability to figure out new problems. These abilities tend to peak in our 20s.

Crystallized intelligence, on the other hand, is likened more to wisdom, and intelligence gained from experience and knowledge of the world.

Harvard University Professor David Laibson, one of the co-authors of “What is the Age of Reason?” explores these different forms of intelligence and how they impact our competence in making financial choices. As we get older and gain more experience, we become better investors (crystallized intelligence) but our ability to solve new types of problems (fluid intelligence) declines.

Middle-aged adults are at the decision-making sweet spot, peaking in our mid-50s. Afterwards, according to Laibson, the decline is gentle initially, but tends to accelerate as we age.

Unfortunately, most of us, especially self-directed investors, believe we are at our cognitive peak long after that. In the research study, “Old Age and the Decline of Financial Literacy”, the authors found that “financial literacy” scores decline by about 2% each year after age 60 but “confidence” in financial decision-making abilities does not decline with age. A crucial characteristic of cognitive impairment is that people are usually unaware of their condition and reduced abilities. Eventually this mismatch can impact financial affairs.

How often does this important issue come up in financial meetings? According to Robyn Graham, a chartered financial analyst and portfolio manager at ETF Capital Management in Toronto, “The discussion generally centers around evaluating if they have enough money and how to make that money last. The topic of cognitive decline does not really come up unless they are looking for us to take over management of their elderly parents’ portfolio.”

Graham’s experience is consistent with the studies and literature about planning for cognitive decline. Bringing up the conversation is not easy for investors, advisors or even family members and is most often not discussed before it has become a real issue.

So, what can you do to protect your wealth?

Toronto Rehab geriatric outpatient clinic social worker Andrea Brodey suggests the following:

  1. Start the conversation. There is never an easy time, so better now than waiting until it is too late.
  2. Build a community around you that you can trust. Seek the support of family and find a good financial planner.
  3. Share your wishes— financial and health-related— while you have the cognitive ability to make sound decisions. Make a will and prepare the appropriate powers of attorney.
  4. Let people close to you know where they can find everything – financial and legal documents, bank account passwords and account information.
  5. Keep learning and educating yourself about your financial affairs. Stay involved.
  6. Educate yourself about the aging process. Make lifestyle choices that will help keep your brain as healthy as possible as you age.
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