Professors at Harvard University say people’s ability to make “good financial decisions” declines after mid-50s
For most people in their 60s and 70s, the idea that they are too old to manage their own money seems entirely ridiculous.
However, a set of controversial scientific findings by university professors in America have made their way to Britain and are expected to ruffle feathers among older generations.
The research, from Harvard University, suggests people’s ability to make good financial decisions peaks at age 53 and then starts to decline.
Nest, the government-run occupational pension scheme for British workers, is so concerned by the findings that it has called upon the industry to develop financial products which let people plan their pensions in their 50s, saying that financial decision-making above this age could become “increasingly problematic”.
But Ros Altmann, the Government’s older workers champion, who also studied at Harvard, has branded the research “ageist”. She said: “Everybody is different so there is no point in making stereotypes. There are plenty of people in their 80s who are still very mentally capable.”
The results were found by measuring two types of intelligence that help people manage their money. The first is “crystallised intelligence”, which is based on skills acquired through experience, and therefore improves with age. The second is “fluid intelligence” which is based on the ability to solve new problems, and declines with age.
According to the academics, overall cognitive performance declines after mid-50s. This is because the ageing process causes the brain to approach a tipping point at which their “crystallised intelligence” stops offsetting the decline in their “fluid intelligence”.
It has also warned that by the time people get into their 80s, approximately half the population suffer from a significant cognitive impairment, which effectively renders them incapable of making important financial choices.
There are currently 1.38 million people aged over 85, a figure forecast to double in the next 20 years. Dementia also affects one in six people over 80 and one in three over 95, and is a growing priority for the NHS.
The trend is perhaps the reason why more UK-based studies are being commissioned to look at older savers’ ability to make crucial money decisions in later life.
For example, the Money Advice Service ran a study in which it asked people of a range of ages to identify a better deal from two financial products and found nearly 20pc of people aged 55 and over picked the wrong option. This compares to 89pc getting it right overall.
The English Longitudinal Study of Ageing (ELSA) has also recently tested over 50s’ memory and numeric problem solving. It found male abilities remain stable up until ages 60-64, but then begin to decline. It also showed that on average, their ability to recall numbers will have declined by about 30pc by age 80.
The findings are significant given the growing complexity faced by those making financial retirement decisions. Even before the promised overhaul of rules surrounding pensions access next April, many fail to get the best deals. Earlier this year, the Financial Conduct Authority (FCA) concluded that 80pc of savers who buy their annuity from their existing provider could get a better deal on the open market.
In a recent consultation report, Nest said failings in the annuity market show that even if people feel confident, they are still capable of making mistakes, or “suboptimal” decisions.
Paul Taylor, a chartered financial planner at financial adviser firm McCarthy Taylor, said people tend to lose confidence with money as they get older, mainly because they feel vulnerable. “When people can no longer work, they sometimes get to a point where they become too scared to make any decisions at all. That is the worst position to be in. The older they get, the more fragile and exposed they tend to feel.”
Mark Fawcett, chief investment officer at Nest, suggests people should aim to plan how they will finance their retirement in their 50s, while their mental capacity to manage money is likely to be in a “sweet spot”.
Drawing upon Pensions Institute research which suggests that because of rising life expectancies, the best time to buy an annuity is now when people are in their 70s and 80s. Mr Fawcett also said there should be more financial products that allow people to select options in their 50s and 60s. These would be chosen in advance, ready for when people reach the point at which it makes most economic sense to tie their money up in an annuity, which could be at least a decade later.
Such products are not yet available, but there are a number of things people in their 50s can do now to plan for their retirement. A valuable exercise for anyone wanting to get organised in advance, is making a retirement budget. This should detail exactly what they earn and spend every month now, compared to what they might earn and spend in retirement. A financial planner will charge anything from £1,500 for this service as part of a wider advice process, but it is possible to do a basic version yourself.
Retired people tend to drive less as they have no daily commute to work, so they might want to think about scaling down the cost of petrol or train tickets. And other items such as holidays or day trips might begin to take up a bigger chunk of their budget, for example. Savers can work out their expected retirement income by phoning their pension firm or firms and asking for an estimate.
Nicola Bywater, a financial planner at Bespoke Advice, said it is common for people to find they are several thousand pounds short of the income they would ideally like. “The good thing about discovering this in your 50s is that it’s not too late to do something about it,” she said.
Another thing to do is appoint a family member, a friend or a professional to manage their estate in case they become unable to in the future. The legal term for this is a “power of attorney”, and you must appoint one while you are sitll “compus mentus”, or else their rights are void.
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