The finance decisions (mistakes?) we make as we age
As if growing older does not come with enough curly challenges, here is one that hits your wallet.
Key points
- Report finds financial mistakes increase with age.
- We make crucial age-related decisions when our cognitive ability is in decline.
- The report outlines health and policy solutions that limit mistakes.
We make poorer decisions about our finances as we age but, at the same time, feel more confident making decisions.
That is the paradoxical and cautionary finding of new research by the Australian Research Council (ARC) and Centre of Excellence in Population Ageing Research (CEPAR).
The research found that making financial mistakes increases with age, is more complex, involves large sums of money, and has grave consequences.
The CEPAR report also explores solutions for mitigating risks and boosting cognitive health for decision-making in old age.
This includes changing lifestyle, diet, exercise, and cognitive health.
Researcher Rafal Chomik said: “Some of the most important financial decisions are needed at a time when your cognitive ability is at greater risk of decline.”
The research found about 5 per cent to 20 per cent of over-60s are estimated to have a mild cognitive impairment, characterised by problems with memory, language, thinking or judgment.
Thankfully, it is not severe enough to disrupt daily life but is likely to affect complex financial decisions. But as the population ages, the share of people with some cognitive impairment is expected to increase.
The researchers concluded our policymakers need to develop better strategies to address health and financial risks in late-middle age, before the onset of old age.
The report says poor decision-making can be reduced by:
- Creating contingency plans, for example, by simplifying finances.
- Locking in financial products earlier and via advanced care planning.
- Delegating financial decisions to family or advisers with appropriate safety mechanisms to prevent financial fraud and exploitation.
Professor of Pension Economics, Hazel Bateman, says effective consumer finance and superannuation policy initiatives are needed to mitigate impulsive decision-making, which can also affect seniors’ financial decision-making.
She wants more defaults in financial products, such as super, which can simplify and guide decisions.
“We need better regulation of information provision, financial literacy initiatives, and protections against poor financial advice to vulnerable consumers,” she said.
Behavioural finance research featured in the report shows that decisions can be simplified and guided by:
- Reducing the number of choices by providing fewer but higher quality products.
- Simplifying supporting information by designing product disclosures that inform rather than confuse.
- Adding nudging information and anchoring suggestions.
- Timing of information provision and financial education.
- Coaching the decision and providing advantageous defaults, outsourcing, or sharing decisions with advisers.
These changes must be carefully introduced and tested, Professor Bateman says.
“This approach is relevant in the context of a new policy requiring superannuation providers to help retirees spend their savings with little guidance on how to do so. The policy is, therefore, an opportunity to design by testing,” she said.
For further reading: CEPAR
