Previously I’ve written of studies suggesting that our capacity to make financial decisions peaks around the age of 53, and declines thereafter at a rapid rate. Decisions related to borrowing and debt peak at around age 53 while investment skills peak around age 70, with the difference likely due to the varying ages at which we get experience in borrowing and investment.

The risks to our cognitive functioning seem to be increasing given the rise of dementia-related conditions. Recently, I relayed how dementia is about to overtake heart disease as the leading cause of death in Australia. Dementia, including Alzheimer’s disease, contributed to just 0.2% of deaths in 1968, yet that’s now risen to 9.1%. It’s already the leading cause of death for women due to their longer life expectancies increasing the risk of developing dementia.

The latest research on cognitive decline in financial matters

New research appears to confirm that cognitive decline is evident in financial affairs often long before any illness is officially diagnosed. A paper from the Federal Reserve Bank of New York reveals that credit scores among Americans who later develop dementia start falling well before their disease is formally identified. 12 months before diagnosis, these people were 17% more likely to be delinquent on their mortgage payments than before the onset of the disease, and 34% more likely to be delinquent on their credit card payments. The paper suggests the problems can develop early, with the probability of delinquency among credit card holders being consistently worse up to five years before diagnosis, and for mortgage holders is worse in the three years prior to diagnosis.

Another study published in the Journal of Political Economy has found that falling cognition not only impacts decision making when it comes to debt, but also investments too.

“First, we show that older people tend to underestimate their cognitive decline. We then show that those experiencing a severe decline but unaware of it are more likely to suffer wealth losses. These losses largely reflect decreases in financial wealth and are mainly experienced by wealthier people who were previously active on the stock market. Our findings support the view that financial losses among older people unaware of their cognitive decline are the result of bad financial decisions, not of rational disinvestment strategies.”

Increased susceptibility to financial scams

Cognitive decline not only effects our decision making on investment and debt matters but also makes us more vulnerable to scams and fraud. Previous studies have shown that older age and lower levels of cognitive function are two key markers for susceptibility to falling victim to financial scams (the other two markers being lower psychological wellbeing and lower literacy).

Last year, there were more than 600,000 cases of scams in Australia, with losses of more than $2.7 billion.

As noted by Clime’s John Abernethy in a Firstlinks article a few weeks ago:

“From a livelihood and welfare perspective, a scammer can create havoc for an unwitting target. Whether the target loses their life savings, their superannuation, or a deposit for a house, the devastation is the same. Money that is scammed is stolen and lost. It can change lives unless there is recompense.”

Sadly, the research shows that financial fraud among the elderly often comes from those closest to the victim, including family members, caregivers and friends.

But it can also come from strangers and there are certain types of deception which are more effective than others. Email phishing that relies on reciprocation – the tendency to repay what another person has provided them – is more effective on the elderly.

There’s also evidence that as we age, we have greater difficulty detecting the “wolf in sheep’s clothing”: someone who appears trustworthy but is not acting in a trustworthy way.

The best defences against cognitive decline

Like it or not, your financial cognition will decline over time. That makes it imperative to have legal and financial guardrails in place to protect your wealth. A financial adviser can be a useful gatekeeper for elderly clients with diminishing cognitive function. Also, having a Power of Attorney is a must, along with an updated Will.

My colleagues Mark and Shani have covered this topic on a recent podcasts which you can see below.

The documents you need to protect your assets

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