Looking ahead: When financial skills decline
This is the second of two parts. Find the first story at right.
Last week's column looked at the growing body of evidence suggesting that the aging brain isn't well-suited to financial decision-making. About half of adults in their 80s suffer from dementia or cognitive decline that impacts their financial management skills.
That raises unpleasant, sensitive questions we all need to consider. This week, let's look at some key actions experts recommend that can help protect you or an aging parent from the financial pitfalls associated with cognitive decline.
Start with a financial checkup
"Many of my clients get a medical checkup before they retire, and we recommend a financial checkup, as well," says Martha J. Schilling, an investment adviser in the Philadelphia area. "We work on simplifying their accounts, reviewing the estate-related legal documents and ensuring that spouses have a good understanding of assets, and that they communicate with each other how they would like assets distributed at their demise or incapacity."
Put assets on cruise control
Our ability to make sound investment decisions declines with age, so consider taking steps in advance to reduce the need for active management of your assets. Active investors should consider becoming passive investors past their 60s by placing assets in low-cost index funds; also consider "automatic" products such as single premium income annuities that pay regular monthly income via electronic deposit.
Protect against fraud
Elderly people with decision-making impairment need more than support from family and friends. They need legal and societal protection from fraud and predatory marketing.
"Unfortunately, we cannot always rely on the patient to report his own problems," says Natalie Denburg, an assistant professor of neurology and neuroscience at the University of Iowa Carver College of Medicine. "People with frontal lobe dysfunction often suffer from impaired awareness and insight, and they aren't aware of both their own deficits and the ways in which their behavior affects other people. They will deny that they have anything wrong with them, even though their deficits are obvious to everyone around them."
Denburg recommends that family and friends be on the lookout for disturbing external signs, including accumulation of large amounts of mailers with disguised sales pitches, frequent phone and mail-order purchases, large bank withdrawals and dwindling savings. "Some older adults and their families have set up safety mechanisms such as putting limits on bank withdrawals and personal checks," she says.
And steer clear of any sort of private investment that isn't available on the public market. "I can't tell you how often I've heard of someone whose friend recommended a no-miss investment in land or a timeshare that turns out to be a scam," says Cindy Hounsell, director of the Women's Institute for a Secure Retirement.
Find a fiduciary Don't work with a financial adviser who is not a fiduciary -- a legal definition that requires an adviser to put the best interest of a client ahead of all else. Regulation of financial advisers is changing, as Washington debates how to pull brokers under the fiduciary umbrella. The outcome of that discussion isn't clear, but for now, only Registered Investment Advisors are fiduciaries. And hire an experienced but younger adviser to get the best odds that she'll still be in business when you need help the most.
Make a succession plan
Pick someone you trust to manage your affairs in the event that you're unable to do so. "Family members are usually at the top of this list, and then friends," says Deborah Jacobs, a lawyer, journalist, and author of "Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide." "For some people, it can be a younger friend, maybe someone you know through church. That sometimes makes the kids suspicious, but it doesn't have to be bad."
Boston elder law attorney Harry Margolis sometimes recommends bringing in a bank or trust company as professional trustee at the same time that he establishes revocable trusts for clients.
Many attorneys point to the living, or revocable trust as the preferred vehicle for giving your trusted co-pilot the legal power to act on your behalf if necessary. The process involves retitling your key accounts and assets to the trust.
"They're well accepted by financial institutions, and you don't have to give up control," Margolis says. "You're naming a co-trustee who can step in if necessary. And your trustee can keep an eye on what's going on -- if you make a crazy investment or suddenly start spending a lot of money on the Home Shopping Network, the trustee can take action."
The living trust also serves as the controlling document for disposition of most of your estate after your death. These are most appropriate for individuals with substantial assets and complex holdings; sometimes, durable power of attorney documents can suffice, Jacobs says.
The process of establishing a living trust has another benefit in that it kicks off an inventory of your accounts and assets; that presents an opportunity to consolidate. "We often see clients who have accumulated retirement accounts at various jobs, and other assets," Margolis says. "It can be very difficult to know what they actually have."
Plan long-term care
Include in your plan the possible cost of incapacitation that requires nursing care. One-third of Americans will need long-term care at some point in their lives, according to the Center for Retirement Research at Boston College, with semiprivate nursing room costs reaching $77,000 per year.
"It's hugely important," says Jacobs. "You could reach a point where balancing a checkbook or managing a certain amount of money becomes overwhelming, but you're not incapacitated in the legal sense. It's a matter of degree and hard to admit you've reached that point, or that you need to ask for help." And, she adds, "We're heading into a world where there will be a lot of people who haven't done what's necessary."
Mark Miller's Retire Smart column is carried on Tribune Media Services.