Aging brain may not be on the money

This is the first of two parts. The second is at right.

We've all received the pitch in the mail: Transfer your credit card balance to a new card at a lower interest rate. The catch: Payments on the new card will be applied first to the transferred balance; meanwhile, a higher interest rate is applied to new purchases -- and payments are applied to that balance only after the transferred amount is paid off.

The solution is a no-brainer, right? Keep using your old card for new purchases until you've paid off the transferred balance on the new one. But research shows that cardholders of varying ages aren't equally proficient at figuring that out.

One-third of cardholders will get it immediately -- what researchers call the "eureka moment" -- while another one-third never get it right.

Cardholders ages 35 to 44 are most likely to have the eureka moment because they're young enough to have acquired some financial smarts and still have most of their cognitive faculties intact.

Where is the greatest degree of confusion found? Among adults over age 65, according to the Center for Retirement Research at Boston College.

A growing body of evidence suggests that the aging brain isn't well-suited to financial decision-making. Roughly half of adults in their 80s suffer from dementia or cognitive decline that impacts financial management skills, according to David Laibson, an economics professor at Harvard University and co-author of a research report with three other economic and financial experts on aging and reasoning ability.

Laibson laid out the worrisome findings at a recent Morningstar Investment Conference (Find it here at  bit.ly/ihnohC).

Other researchers have documented characteristics of poor decision-making in the elderly that leave them vulnerable to the marketing tactics of fraudulent and abusive financial services.

A research team at the University of Iowa points toward problems with complex decision-making in some older adults who haven't been diagnosed with any specific neurological or psychiatric diseases.

"Many older people experience far more dramatic declines in cognitive abilities that are not related to memory, such as concentration, problem solving, and decision-making," according to Natalie Denburg, an assistant professor of neurology and neuroscience at the University of Iowa Carver College of Medicine.

Denburg's team found that impaired decision-makers were more vulnerable to deceptive advertising claims and tended to go for promises of short-term rewards at the expense of long-term benefits.

"They also often assumed long-term benefits in situations where there are none," she adds. "We see these characteristics as direct consequences of neurological dysfunction in systems that are critical for bringing emotion-related signals to bear on decision-making."

Much is at stake; Laibson notes that $18.1 trillion of the $53.1 trillion in U.S. household net worth is held by the vulnerable population over age 65 -- a percentage that will rise as baby boomers age in the years ahead.

"It turns out that our peak ability to make good choices in the world comes in the mid-50s, and after that there is a decline," Laibson says. "So we have to think about that, and of course dementia makes that decline even more severe."

The evidence on cognitive decline raises unpleasant, sensitive questions we all need to consider. Laibson says investors in their 50s and 60s should make plans for the possibility that "things will go badly" in their 80s. And if you're a younger adult with older parents, it may be time to have a frank conversation about how you can work together to protect them down the road.

Procrastination can be your worst enemy, because the timing of cognitive decline is impossible to predict -- and once problems occur, you're no longer in a position to fix them yourself. That requires a proactive approach to issues that no one wants to contemplate.

"People who had been functioning well start to make poor investment and spending decisions," says Harry Margolis, an elder law attorney in Boston. "It's often very difficult to intervene. We see cases where the husband has been in control of finances and wants to keep doing so even if he can't do it very well."

Adult children can find getting involved just as difficult. Parents and children need to discuss and plan for issues that include everyday household finance, but also longer-range issues such as long-term care and estate planning. But these topics can be so charged with emotion that no one knows how to get the conversation started.

Just 47 percent of adult children say they have had detailed discussions with their parents about their income and expenses, according to the Employee Benefit Research Institute 2010 Health Confidence Survey. A slightly larger number (54 percent) of retired parents reported that they've had those discussions.

But an even bigger gap emerged when the institute asked adult children and retired parents if children were aware of the parents' approximate income; 42 percent of adult children reported they did know, while 63 percent of parents said they thought their children had the information.

Next Week: A look at steps you can take to protect your assets from the risks associated with cognitive decline.

Mark Miller's Retire Smart column is carried on Tribune Media Services.