How Does Aging Affect Your Financial Decisions?

Good financial planning is especially important for older investors.

Elderly couple on sofa

Just because you’re getting older doesn’t necessarily mean you’re becoming unable to make sound financial decisions anymore — contrary to the conclusions of several studies. New research shows that you can still rely on your abilities, even though your brain no longer processes information as well as it once did.

Previous studies, including one at Texas Tech University, show that fluid intelligence decreases as you age — a phenomenon known as cognitive decline. This research shows that we tend to lose cognitive skills at the rate of about 2% per year after age 55.

In other words, to put it bluntly, as you get older, you get dumber.

But Wait, There's Some Good News 

Fortunately, newer research shows that this isn’t necessarily true. That’s because your lifetime of acquired financial expertise and knowledge offsets the natural decline in your cognitive ability, according to a new study at the University of California, Riverside. Using credit scores and cognitive ability tests, UC researchers found evidence that our brains create two different types of intelligence — fluid and crystallized.

And they discovered that crystallized intelligence, gained from experience and accumulated knowledge, is actually more important in making financial decisions than is fluid intelligence (the ability to think logically and process new information).

So (cue trumpets) you’re not getting dumber at all — well, at least not to the degree believed previously — because you can rely on your crystallized intelligence as your fluid intelligence wanes.

Still, decline in fluid intelligence (cognitive decline) may help explain why there’s so much financial abuse of the elderly — why more people in their 70s, 80s and 90s fall victim to money scams than do much younger people. Based on the formula cited above, a typical 90-year-old would have about half of the decision-making ability he or she had at age 65.

Perhaps you have found yourself asking, “How could my mother have fallen for that? I didn’t think she was that dumb!” Well, when she was 60, she wasn’t. But now that she’s 90, apparently she is. At least that’s what the research tends to suggest.

This is why I’ve often warned you to be on guard when you make financial decisions once you’ve entered your 60s — because you’re not likely to manage your money as well as you might have during your 40s and 50s.

Both Good and Bad Financial Habits Solidify the Older You Get

The new research suggests that once you learn something through experience, you don’t unlearn it; it stays with you into your 80s and 90s. But it also means that if your financial experience was negative or based on incorrect assumptions, these errors will remain locked in your brain for the rest of your life.

For example, if you have a history of making poor financial decisions — you never saved, you were always a spendthrift, you used your money in inappropriate and immature ways — that will likely stick with you. Meanwhile, your fluid intelligence — your basic ability to think logically — is declining, so what you’re mostly left with are your dysfunctional memories and experiences. That could be a double whammy against you, financially speaking.

But the converse is also true. If your financial history is positive — you saved, spent wisely, invested wisely and developed other good financial habits — your crystallized intelligence should serve you well as you get older.

But even if that describes you, it doesn’t mean that you should rely solely upon yourself in making all future financial decisions. Consulting an independent, objective financial advisor can benefit you regardless of your financial background.

For example, we can explain how a decision you’re about to make could impact other aspects of your financial life in ways you may not have considered. We can help you avoid scams that target older people like you. And even if a certain course of action seems perfectly obvious to you, we can provide a valuable second opinion.

Still, self-knowledge and self-awareness are valuable tools. That’s why we try to keep you abreast of what neuroscience and behavioral finance are discovering about how your brain influences your financial decisions.

Now that you understand it, you can explain to your dinner guests why Uncle Bob keeps telling the same old stories every time the family gets together: It’s because his crystallized intelligence has left him with nothing else.

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