How Cognitive Decline Impacts Your Financial Life in Retirement
Just as your investments are subject to various risk factors like rising interest rates, currency risk, and economic turmoil, there’s another type of risk you may not have even considered: your own mental well-being.
When you think of the term “cognitive decline,” the most extreme cases likely come to mind—dementia or Alzheimer’s. But the reality is, as you age, it’s inevitable that you’ll experience at least a small level of cognitive decline. Around 20% of people in their mid- to late-70s experience mild impairment, and that percentage grows to half of all people in their 80s.
Even if you’ve successfully built a sizable nest egg during your working years, developing and implementing a withdrawal strategy in retirement can often be the greater challenge. Trying to go it alone, even with full cognitive ability, is often a risky way to repay yourself for all those decades of diligent saving.
Here are a few reasons why the decumulation phase is challenging for retirees, and what to do to prepare yourself for future mental impairment.
Why It’s Harder to Descend the Retirement “Mountain”
Mountains are common metaphors for retirement. During your working years, you’re ascending the mountain while growing your savings and building a plan for retirement. Once you reached the summit, you’re ready to leave the workforce behind and begin drawing down your savings in retirement.
But as any professional climber knows, the descent is actually much more dangerous than the climb. Take Mount Everest, for example. Only 15% of deaths occur during the climb to the top. By comparison, 56% happen on the way down.
Coming down the retirement mountain is difficult primarily for two reasons: taxes and market risks.
When pulling income from multiple sources, your tax obligations will vary. Without taking this into consideration, it’s possible for retirees to draw down inefficiently and pay more in taxes than necessary.
In terms of market risks, we’ve seen first-hand this year how dramatically the market can fluctuate. While younger investors have years, even decades, to ride out a downturn, retirees may need access to their investments sooner. If a retiree’s portfolio is overallocated to riskier asset classes, their retirement income may suffer greatly during periods of volatility. Add in factors like rebalancing and knowing which funds to sell to generate cash, and things can get complicated very quickly.
Cognitive Decline and Your Financial Wellbeing
The point here is that wealth management does not get easier in retirement. In fact, the older you get, the more impactful your financial decisions often become. While there’s likely still plenty of time to prepare yourself and your finances for a decline in your cognitive abilities and financial decision-making, here are a few tips to consider.
Get Trusted Family Members Involved
A recent study by the Federal Reserve found that only 46% of respondents age 70 and older have a power of attorney that names someone to act on their behalf. If you haven’t yet talked to your loved ones about the “what ifs” of experiencing cognitive decline, now’s the time to do so.
With the ability to act on your behalf, your children or grandchildren can help make sure bills are paid and all financial obligations are being met. While you can still stay involved in the decision-making process, it’s helpful to have others handling the day-to-day tasks and ensuring nothing slips through the cracks.
For example, a missed Medicare payment could lead to a gap in coverage. If that happens, you could get hit with massive medical bills—not to mention, it may be hard to get coverage back without paying some sort of penalty.
Talk With Your Financial Planner
Once you’ve communicated your concerns and wishes with your family members, remember to speak with your team of professionals too. Your attorney and financial advisor can work together to build a plan that accounts for future cognitive decline. They’ll prepare and file the proper paperwork, develop a plan to protect your assets, identify insurance coverage options, consider future medical costs, and more.
It’s important to recognize that even though you may feel confident in your ability to manage your finances as you age, the data shows time and time again that that’s not always the case. Your advisor is there to help protect your hard-earned wealth, ensure that your wishes are being met, and plan a future that best serves your evolving needs.
We Can Help You Prepare for a Sound Retirement
Reaching retirement is an amazing accomplishment and one you should be proud of. Whether you’ve done it all on your own or found a partner in a financial professional, it’s now time to turn your attention to safeguarding your nest egg. Just as we help you prepare for risks like high inflation or market volatility, there are things we can do together to consider the risk of cognitive decline as well.
Please feel free to reach out to us if you or your loved one are concerned about the impact of cognitive decline on your financial wellness. We’d be more than happy to see what we can do to help.