Close to 30% of adults aged 65 and over experience cognitive decline, which may jeopardize your financial management skills. This could be your most significant financial blind spot, but there are straightforward steps to safeguard your future.

This podcast episode is part of a new monthly series focused on retirement, featuring practical advice and engaging discussions. Tune in every third Wednesday to gain insights that empower your financial confidence.

You’ve prepared for retirement, saved consistently, strategized your Social Security, and considered market volatility. But what occurs if you find yourself unable to manage your finances effectively?

Almost 30% of seniors face some level of cognitive impairment, varying from mild issues to dementia. Notably, financial management is often among the initial skills to decline.

Ironically, many overlook this possibility in their planning.

In a recent podcast episode, we examined how health risks, particularly cognitive decline, can represent a major oversight in retirement planning, along with proactive measures you can take to preserve your finances, support your loved ones, and care for your future self.

HEALTH RISKS: A CRUCIAL FACTOR IN RETIREMENT PLANNING

A recent research study by Chris Heye, Ph.D., emphasizes a shift in understanding retirement risk. Traditionally, we concentrate on market fluctuations, inflation, and tax implications. However, health-related risks are becoming equally critical due to our increased longevity.

“In many respects, advancements that extend our lives also elevate financial responsibilities and risks,” explains Heye. “Many of us may spend 20 to 30 years in retirement, dealing with escalating healthcare expenses, long-term care needs, and a more intricate financial landscape.”

Another significant concern is the widening gap between lifespan (how long we live) and health span (how long we remain healthy). Heye adds, “We can sustain life longer, but we still have challenges in ensuring people remain healthy.”

COGNITIVE DECLINE: A CRUCIAL FINANCIAL CONCERN

Cognitive decline is a standout health risk as we age. In the past, it posed less of a financial threat since fewer individuals lived long enough to encounter it. That has changed dramatically.

A major factor contributing to poor financial choices in later life is a decline in what experts refer to as “executive function.” Heye explains, “Executive function involves planning, organization, and making connections. This is essential for financial decision-making, especially in retirement. Unfortunately, as we age, many of us experience a decline in these abilities.”

Essentially, the very skills needed for effective money management are often the first to deteriorate.

WAYS TO PROTECT YOURSELF AND YOUR ASSETS

Addressing cognitive decline in your planning isn’t straightforward, but early action can be beneficial. Erin Gilmore Smith, Head of Estate Planning, shares that you don’t have to tackle everything at once. Break it down into manageable steps.

Start by designating a trusted individual on your financial accounts—someone your institution can contact if anything appears amiss. Then, prioritize these key elements:

Durable power of attorney: This document allows someone to handle your finances if you’re unable. They can write checks, manage your brokerage account, and ensure your financial matters are addressed. “Involve that person before a crisis occurs,” advises Gilmore Smith.

Health care power of attorney: This appoints someone to make medical decisions for you. Ideally, this person should be accessible, organized, and ready to advocate on your behalf.

HIPAA authorization: “Many individuals are unaware that while a state may allow for a health care power of attorney, federal law restricts that individual from accessing your medical information,” explains Gilmore Smith. Don’t let this hinder your planning.

Last will and testament: A will may suffice for simpler households. However, for more complex situations—such as substantial assets or real estate across states—consider a revocable trust that complements your will. “This trust allows us to retitle assets effectively, ensuring they are managed by your appointed trustee upon your passing or if you can no longer manage your affairs,” explains Melinda Merk, an estate attorney.

Ensure your family knows your team: Whether it’s your estate planner or financial advisor, Gilmore Smith encourages early groundwork. “Establish this foundation, as you don’t want your first family meeting with your advisor to occur during a crisis.”

HOW TO FIND THE RIGHT ASSISTANCE

If you’re uncertain where to begin with these arrangements, consult your financial advisor for recommendations, or seek suggestions from family and friends.

Merk also recommends attorneys affiliated with the American College of Trust and Estate Counsel (ACTEC). “You can trust that any ACTEC member attorney is skilled and an excellent advocate,” she states.

WOMEN FACE UNIQUE CHALLENGES

Planning for uncertainties can be especially intricate for women. For one, we often live longer and bear the financial impact of that longevity. This extended life expectancy frequently leads women to outlive their spouses, creating complications for those who haven’t been actively involved in managing family finances.

“Women face an additional burden that deserves more focus from financial professionals and educators, as millions will navigate this process in the coming years,” Heye explains. To prepare, Gilmore Smith stresses the need for women to cultivate both knowledge and community. “Plan ahead and engage in financial discussions, building your support network long before it’s needed.”

Longevity complicates matters further. If you reach your 90s, your children, now in their 60s or 70s, may also face cognitive challenges. You need to consider if they are still capable of managing your finances and affairs. As Gilmore Smith points out, it’s vital to have backup plans when appointing individuals to handle your finances and health. “Some may designate a child and then a grandchild as a secondary option,” she explains. “This can work well, allowing the child to ask for help when feeling overwhelmed.”

SIMPLE STRATEGIES TO MINIMIZE RISK: PROTECTED INCOME

Another effective approach? Streamline your finances. Heye highlights the benefits of protected income—like annuities—to lessen financial complexity in later years. “Protected income simplifies decision-making and allows for automation,” he notes. “I often recommend that older adults and their families place as many things on autopilot as feasible.”

This strategy serves as a form of “cognitive insurance.” Heye explains, “It minimizes the likelihood of making poor decisions by reducing the number of choices you face and limiting the chances to interfere with matters that should remain untouched.”

FINAL THOUGHTS

If you haven't prepared for a time when managing your finances may become overwhelming, start with small actions. “From an estate planning viewpoint, you need the essentials,” states Gilmore Smith. “Ensure you have a durable power of attorney, a healthcare power of attorney with HIPAA authorization, and a last will and testament. Once these basics are established, you can expand from there.”

Additionally, begin forming your support system early. “I like to refer to this as your financial wellness team,” Heye notes. “This team can include professionals, family, and trusted friends. It’s almost never too early to initiate this process.”

Lastly, don’t procrastinate. “Life can be hectic, but don’t delay,” urges Merk. “Lacking basic documents not only leaves you vulnerable to crises but also places a significant burden on your loved ones.” While cognitive decline isn’t guaranteed, preparing for it is vital. The best defense is to establish systems, safeguards, and the right support while you’re still in control.

Protected income can enhance stability in retirement, especially with the potential for cognitive decline. If you want to explore this topic further, resources are available to assist you.

Protect Your Retirement From Cognitive Decline: The Link Between Cognitive Health and Financial Security