How Old is Too Old for Hands-On Financial Management?

by John Kiernan on June 28, 2012

RetirementEver pull up to a stoplight and glance over to see an elderly driver beside you hunched over the steering wheel, peering through goggle-like glasses and express concern over their ability to continue driving safely? Perhaps, but I bet you haven’t given much thought to their ability to manage their finances into old age. That’s a big mistake.

People are becoming increasingly reliant on their 401(k) as a source of retirement income, and while that might not seem like too big of a deal on the face of things, a 401(k) is inherently volatile and requires consistent maintenance in order to provide maximum value. This can prove problematic no matter how old you are.

Just look at the results of a recent study from Charles Schwab:

  • 52% of those polled report not having the interest, time, or knowledge to manage their 401(k) properly, and 82% say they spend less than eight hours per year managing their portfolio.
  • Roughly one-third of people are unaware that they are assessed fees related to their 401(k).
  • While 83% of people want professional assistance managing their portfolio, only 10% take advantage of it when offered by an employer.

So why do we expect to magically figure things out once retired? Even if one does save enough during their career, withdrawing just the right amount to be comfortable without risking going broke is tricky. Factor in a bear market and your role as a financial Goldilocks will be even more demanding.

The unfortunate fact of the matter is that brain power declines as we age. Not only are you twice as likely to be diagnosed with Alzheimer’s disease every five years after age 65, according to the National Institute on Aging, but studies also show that cognitive ability declines up to 15 years before death, regardless of whether you have dementia or not. And you thought managing your 401 (k) was hard at your best.

The likelihood that the elderly will make mistakes managing their own money isn’t the only thing that’s worrisome either. They can also be easy marks for fraudsters, according to the Center for Retirement Research at Boston College, because older people tend to remember positive observations about a person more than the negatives that would set off alarm bells in someone younger. According to a 2009 MetLife study, Americans 60 and older had at least $2.9 billion swindled from them in 2010. The Investor Protection Trust also reported that one in five people over the age of 65 were defrauded that same year.

We also have to think about what would happen if a large portion of retired folks wind up unable to make ends meet – an increasingly problematic proposition given the rising age of Baby Boomers. The government would have to step in to provide assistance, and we’d all end up paying. Just look at the concern over Social Security funding.

Ok, but what are we supposed to do about it, short of seeking medical innovations that can delay the effects of aging?

Well, we can use financial products that require less hands-on management in order to provide for retirement. Back in the old days, when pensions were more prevalent, people’s financial futures were much more stable. They could be assured of receiving a set amount of money each month after retirement, and that made it both easier to budget are harder to make catastrophic mistakes.

That’s why I propose a systematic change that would require people to put less money toward 401(k)s and more toward pension-like benefits such as Social Security. Not only would this make older folks feel more secure, but this heightened confidence would also increase their spending power, thereby making the whole economy more stable.

Talk about taking down two birds with one stone!

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