MONEY Kids and Money

The High School Class That Makes People Richer

Graduates with $$ on their caps
Mark Scott—Getty Images

Kids really do benefit from learning about money in school, new data show

Most experts believe students who study personal finance in school learn valuable money management concepts. Less clear is how much they retain into adulthood and whether studying things like budgets and saving changes behavior for the better.

But evidence that financial education works is beginning to surface. Researchers at the Center for Financial Security at the University of Wisconsin recently found a direct tie between personal finance classes in high school and higher credit scores as young adults. Now, national results from a high school “budget challenge” further build the case.

Researchers surveyed more than 25,000 high school students that participated in a nine-week Budget Challenge Simulation contest last fall and found the students made remarkable strides in financial awareness. After the contest:

  • 92% said learning about money management was very important and 80% wanted to learn more
  • 92% said they were more likely to check their account balance before writing a check
  • 89% said they were more confident and 91% said they were more aware of money pitfalls and mistakes
  • 87% said they were better able to avoid bank and credit card fees
  • 84% said they were better able to understand fine print and 79% said they were better able to compare financial products
  • 78% said they learned money management methods that worked best for them
  • 53% said they were rethinking their college major or career choice with an eye toward higher pay

These figures represent a vast improvement over attitudes about money before the contest, which H&R Block sponsored and individual teachers led in connection with a class. For example, among those surveyed before and after the contest, those who said learning about money was very important jumped to 92% from 81% and those who said having a budget was very important jumped to 84% from 71%. Those who said they should spend at least 45 minutes a month on their finances jumped to 44% from 31%.

The budget challenge simulates life decisions around insurance, retirement saving, household budgets, income, rent, cable packages, student loans, cell phones, and bank accounts. Teachers like it because it is experiential learning wrapped around a game with prizes. Every decision reshapes a student’s simulated financial picture and leads to more decision points, like when to a pay a bill in full or pay only the minimum to avoid fees while waiting for the next paycheck.

Block is giving away $3 million in scholarships and classroom grants to winners. The first round of awards totaling $1.4 million went out the door in January.

The new data fall short of proving that financial education leads to behavior improvement and smarter decisions as adults, and such proof is sorely needed if schools to are to hop on board with programs like this in a meaningful way. Yet the results clearly point to long-term benefits.

Once a student—no matter what age, including adults—learns that fine print is important and bank fees add up she is likely to be on the lookout the rest of her life. Once a student chooses to keep learning about money management he usually does. Added confidence only helps. Once students develop habits that work well for them and understand pitfalls and mistakes, they are likely to keep searching for what works and what protects them even as the world changes and their finances grow more complex. Slowly, skeptics about individuals’ ability to learn and sort out money issues for themselves are being discredited. But we have a long way to go.

 

MONEY Aging

Pop Goes the Age Discrimination Bubble

senior man blowing bubble out of gum
Getty Images

Age discrimination charges have returned to pre-recession levels—another sign we're getting back to normal

The popular narrative holds that age discrimination is off the charts and employers can’t shed workers past 50 quickly enough. Yet age-related complaints filed with the federal government fell for the sixth consecutive year in 2014, and the percentage of cases found to be reasonable have been trending lower for two decades.

Certainly, there remains cause for concern. The 20,588 charges filed under the Age Discrimination in Employment Act are higher than in any year before the recession. But the number is down from 21,396 in 2013 and from a peak of 24,582 in 2008, according to new data from the Equal Employment Opportunity Commission.

Meanwhile, the EEOC found reasonable cause in only 2.7% of the cases filed. That is up from 2.4% in 2013 but otherwise the lowest rate since at least 1997. Monetary awards hit a five-year low of $78 million.

Just about everyone past 50 knows someone who believes they were discriminated against in the workplace because of their age. In a 2012 survey, AARP found that 77% of Americans between 45 and 54 said employees face age discrimination. Clearly, in many cases older workers command higher wages. Organizations can cut costs and make room for younger workers by moving older workers out—even though doing so on the basis of age is against the law.

This helps explain the rise in age discrimination charges during and since the recession, when companies undertook vast reorganizations and laid off millions of workers to cut costs and adjust to the slow economy. Older workers who lost their job have had a difficult time finding employment, further driving them to seek relief wherever possible.

Now age-related charges in the workplace are roughly at pre-recession levels. Charges ranged between 16,008 and 19,124 from 2000 through 2007. Returning to near this level is the latest sign—along with more jobs and rising wages—that the economy is getting back to normal.

Age discrimination is a serious issue. It is more difficult to prove than discrimination based on race, sex, religion, or disability. It also takes a heavier toll than other forms of discrimination on the health of victims, research shows. Boomers who want to stay at work typically need the income or the health insurance that comes with full-time employment. Turning them away places a greater burden on public resources.

Meanwhile, older workers have a lot to offer, including institutional knowledge, experience, and reliability. Some forward-thinking organizations including the National Institutes of Health, Stanley Consultants, and Michelin North America, among many others, embrace a seasoned workforce and have programs designed to attract and keep workers past 50.

None of this is to say age discrimination is no longer a problem. One alarming aspect of the EEOC state data is that warm climates popular with older people have a high rate of age-discrimination complaints. No state had a higher percentage of EEOC age-related complaints last year than Texas (9.2%). Florida had 8.5% of all cases and Arizona had 3%.

Federal officials note that the government shutdown last year contributed to a falloff in cases filed. So official complaints may be understated last year. And an overwhelming number of age-related sleights at the office never get reported. Still, the bubble in recession-related age discrimination cases appears to have been popped. That’s a start.

MONEY Love and Money

Why Cupid Is a Tightwad

In the new normal, fiscal prudence is sexier than ripped abs or buns of steel

When it comes to romance, who needs good looks? These days, Cupid is all about smart budgets and a sterling balance sheet, according to the latest findings on love and money.

A whopping 78% of Americans in a relationship say they prefer a partner who is good with money over one who’s physically attractive, according to a recent poll from rewards credit card Citi Double Cash. More than half believe their partner is looking out for their financial future.

Which is not to say Cupid is blind—but the arrow-slinging god of desire may simply be smarting from the Great Recession. Only recently have jobs and wages begun to show much strength. In this new normal, financial survival is sexier than ripped abs or knowing your way around a wine list. So it is that 52% of Americans expect their valentine this year to order takeout, not take them out, according to a love and money study from Ally Financial.

The Ally study also found that 55% are attracted to potential mates with strong budgeting and saving strategies. Specifically, 21% are attracted to those who pay as they go and avoid debt of any kind, while 18% are attracted to those who know how to chase down and seize a bargain. Just 3% are attracted to a suitor who appreciates the finer things and has a high credit card limit.

These findings help explain the rise of a dating site like creditscoredating.com, which seeks to address the concerns of the fiscally prudent lovelorn.

Yet love and money will always have an oil and water quality. People in a relationship are more than twice as likely to say they are the saver and that their mate is the spender in the union, according to a poll from SunTrust. About half agree that they and their partner have different spending habits. And among those who cop to relationship stress, the top cause is financial behavior.

The good news is that two-thirds say they do not have serious recurring arguments with their partner about money, Ally found. So this Valentine’s Day why not go cheap? The data suggest your date will adore you for it.

Read next: This is the sexiest financial habit

MONEY Retirement

Here’s the Key to Retirement Security

golden egg with map of US on it
Robert George Young—Getty Images

Retirement wellness in the U.S. lags 18 other countries largely because income inequality prevents many from getting the services they need, a report finds.

Workers in 18 countries enjoy greater retirement security than in the U.S., new research shows. The ranking looks at 150 nations and places the U.S. behind South Korea and France, among others, and one notch above Slovenia.

Northern Europe dominates the top of the list with Switzerland (1), Norway (2), Iceland (4), Netherlands (5), Sweden (6), and Denmark (7) all making the top 10. These nations have relatively high tax burdens. But they also have high per capita income and a narrow or improving gap in income equality, key metrics in the 2015 Global Retirement Index from Natixis, a global asset manager. Universal healthcare and sound government finances also boost scores in Switzerland and Norway.

Australia (3) and New Zealand (10) score highly based largely on mandatory retirement savings programs that have put their pension systems on firm footing. Austria (8) and Germany (9) round out the top 10. Researchers note that all the countries at the top of the list share three important traits:

  • A growing industrialized economy with a strong financial system and regulations;
  • Broad access to healthcare and other social services; and
  • Substantial public investment in infrastructure and technology.

The ranking looks at four chief areas: good health and access to quality health services, enough material means to live a comfortable life, access to quality financial services, and a clean and safe environment in which to live.

Part of what holds the U.S. back is growing income inequality, which means resources aren’t available to all Americans, the report concludes. The U.S. also has fewer doctors and hospital beds relative to population than many developed nations.

The report’s ranking criteria are far from perfect. The healthcare spending and social services components that give European countries a lift may not be not sustainable given demographic shifts that have more older people living longer. Meanwhile, healthcare spending doesn’t directly correlate with health in retirement.

Still, the report makes a valuable point: Much of what makes for a secure retirement is out of the control of individuals, who can’t build a hospital, balance the federal budget or fix the pension system. What individuals can and should do, though, is beef up personal savings. Personal responsibility will become increasingly important everywhere as populations age and strain state budgets around the globe.

Yet a lot of people aren’t up to the challenge, the survey concludes. Only 16% of individuals surveyed in 14 countries had a very strong understanding of the annual income they will need to live comfortably in retirement. Another 37% had no knowledge of their retirement income goal. More than half do not have clear financial goals and 78% say that when making investment decisions they rely on gut instincts alone.

 

 

 

MONEY Kids and Money

New Findings About Kids and Money That Your School Can’t Ignore

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Getty Images

For the first time, researchers have directly tied personal finance instruction in high school to better adult behavior. This could change everything.

A required personal finance course in high school leads to higher credit scores and fewer missed payments among young adults, new research shows. These are groundbreaking findings likely to alter educators’ thinking in 50 states.

Until now, researchers have been unable to show consistent evidence that mandatory financial education improved students’ money management skills. With no proof, states have moved slowly on this front—despite encouragement from the president and federal education officials who see financial education as a critical part of the strategy to avoid another financial crisis.

Only 22 states require students to take an economics course, and just 17 require instruction in personal finance, according to the Council for Economic Education’s most recent Survey of the States. While countries like Australia and England have adopted federal mandates for such coursework, the effort in the U.S. is at the state level and has been slow to gain traction.

Critics of financial education have long argued that kids may learn financial concepts but do not retain them long enough to change behavior as adults, and that the power of advertising overwhelms any lessons of frugality learned in high school. Some believe financial education is a waste, and that we are better off using resources to set up third-party point-of-decision counseling.

Now the whole conversation may change. “I hope many people will read this paper and that many more states will adopt financial education in high school,” says Annamaria Lusardi, academic director at the Global Financial Literacy Excellence Center and an economics professor at the George Washington University School of Business.

Looking at students in three states—Georgia, Idaho, and Texas—that recently adopted relatively thorough financial education requirements, researchers tied to the Center for Financial Security at the University of Wisconsin found that young adults 18-22 in those states had higher credit scores and fewer credit delinquencies than students in neighboring states without a financial education requirement.

Interestingly, the first class of students in each state required to take such a course showed little or no improvement in credit score or delinquencies. But each subsequent class made noticeable strides toward smarter money management. This suggests there is a learning curve for teachers and schools, and that they become far more effective with practice.

Specifically, the research showed that three years after high school, students required to take a financial education class had significantly improved credit scores—up 11 points in Georgia, 16 points in Idaho, and 32 points in Texas, outstripping the gains in comparable states. In the third year, all three states also had cut the rate of credit payments at least 90 days late in this age group by 10% in Georgia, 16% in Idaho, and 33% in Texas.

Young adults have been shown to have particularly low levels of financial acumen; they are most prone to expensive credit behaviors like payday loans and paying interest and late fees on credit card balances. This behavior, combined with soaring student debt, often puts them in a financial bind before they earn their first paycheck. A little financial education, the evidence now shows, may go long way.

Read more about kids and money:
4 Costly Money Mistakes You’re Making With Your Kids
3 Money Skills to Teach Your Teen
8 Ways to Teach Your Kids to Be Financially Independent

MONEY retirement income

Simple Steps to Avoid Outliving Your Money in Retirement

Nearly all workers say guaranteed lifetime income is important in retirement. Yet few are doing anything about it.

The slow switch from defined-benefit to defined-contribution retirement plans has been under way for three decades. But only now are workers starting to fully appreciate the impact.

The vast majority of Americans say that having a guaranteed monthly check for the rest of their lives is important, according to a TIAA-CREF lifetime income survey. Nearly half say securing enough guaranteed income to cover monthly expenses should be the top goal of their retirement plan.

Just a year ago, only one third believed guaranteed income should be their top priority. Meanwhile, more Americans now say they would accept bigger risks and smaller returns in exchange for guaranteed income, the survey found.

Few saw this coming in the 1980s, when companies began to abandon their traditional pensions in favor of 401(k) savings plans. The thought was that the 401(k) would complement the guaranteed income from a traditional pension—not supplant it. Today the only guaranteed income most Americans will enjoy in retirement comes from Social Security. Meanwhile, the majority of workers keep the bulk of their liquid savings in a 401(k) plan. And they must manage those distributions throughout retirement, while trying not to run out of money before they pass away.

This new reality is just now hitting a generation that figured their 401(k) plan would grow so big that making the money last in retirement would be fairly simple. But for most it didn’t work out that way—and now they are searching for answers. Guaranteed lifetime income, once a staple of old age for many Americans, has become an elusive grail.

One big problem is that workers typically do not understand how to convert savings into a lifetime stream of income, and they generally do not trust the annuity products available to them. While 84% say lifetime income is important only 14% have bought an annuity, TIAA-CREF found. Fixed annuities through a high-quality insurance company are among the simplest ways to purchase guaranteed lifetime income.

With this gap in mind, policymakers and employers have been taking steps to make it easier and more palatable for 401(k) plan participants to convert some or all of their plan assets to an income stream. Yet 44% of Americans have no idea if their plan offers a lifetime income option. Some 62% have never tried to calculate lifetime income from their current level of savings.

Fortunately, it’s getting easier to figure out the amount of income your 401(k) is likely to provide. For starters, check with your benefits department and ask if your employer has, or is considering, an option that will convert savings into a lifetime annuity. If so, and you’re close to retirement, you can get an estimate of the amount of income it may provide.

There are also online tools for do-it-yourself annuity shoppers.You can get quotes for immediate and deferred annuities at immediateannuites.com. And for pre-retirees, you can get an idea of how far your savings will go by plugging in your age and savings on BlackRock’s CoRi calculator. Currently, BlackRock estimates that a 58-year-old with $1 million in savings and who retires at 65 will be able to purchase $51,600 of annual guaranteed lifetime income.

Annuities come in many varieties—and some have a checkered past, while others may be linked to high fees and hard sales pitches. But immediate and deferred fixed annuities are fairly straightforward and offer the most direct way to secure lifetime income. Typically advisers recommend that you put only a portion of your income into one. (For more on annuities, click here.)

If an annuity sounds right for you, consider moving slowly. If interest rates move up the second half of the year, as many expect, you’ll get more income for your dollars by waiting.

Read next: The Right Way to Tap Income in Retirement

MONEY bonds

This Guy Knows the Secret to Beating Low Interest Rates

Jeffrey Gundlach, star bond investor and head of DoubleLine Capital
Brendan McDermid—Reuters Jeffrey Gundlach, star bond investor and head of DoubleLine Capital

Jeffrey Gundlach, the 'new bond king,' is standing against the crowd—and so far this year, he's been spot on.

In the early days of 2015, few people have been more alone—and right—about bonds than Jeffrey Gundlach. That doesn’t mean the whole year will go his way. But fixed-income investors should probably lend an ear to his contrarian view.

Gundlach is the founder and chief investment officer of DoubleLine Capital. Forbes recently crowned him “the new bond king” for his ability to stand against the crowd and rack up big gains. Gundlach was betting on lower rates in 2011 when reigning bond king Bill Gross was betting the other way. Gundlach proved right. Gross was later forced out at PIMCO, the giant asset manager he had founded—and a new king ascended the throne.

Today, Gundlach is at it again. While almost all of Wall Street has been forecasting higher bond yields, he has been predicting another year of falling yields and solid returns. Economists generally expect the 10-year Treasury bond yield to rise to 2.5% to 3%, from about 1.7% now. Gundlach believes we’re headed below (maybe well below) the record low yield of 1.38%, giving bondholders another year of returns in excess of the interest payments they collect.

Why should you listen? Just a month ago the T-bond yield stood at 2.2%, and most economists were forecasting a rise to 3.25% or higher. So while Gundlach has been on target, racking up gains, others have been scrambling to adjust.

Interest rates have been falling pretty much nonstop since 1981, when Justin Timberlake was a newborn and Blondie was a hit maker. They will reverse at some point, and with the Fed signaling its first short-term funds hike since the recession (after midyear) a lot of pros figured this would be the year. That may yet prove to be the case—and if it is, investing for income will turn out to be a dangerous game.

Bond prices fall when yields rise. In normal times, an orderly decline in bond prices isn’t such a big deal. But with yields so low there isn’t a lot of cushion. Even a modest decline in prices would overwhelm the income from a bond yielding less than 2%. In recent years, income investors have flocked to riskier but higher yielding junk bonds and bond substitutes like real estate investment trusts, master limited partnerships and preferred shares. All of those now look priced for low returns this year—and if yields move higher losses are not out of the question.

For that reason, most experts say income investors should be diligent about diversification and stick with the highest quality credit. They advise staying away from long-term bonds, which are most sensitive to swings in interest rates. Bonds that mature in about five years appear to be the sweet spot. A fund like Vanguard Total Bond Market would help with this approach with a 2.5% yield, high-quality holdings, and an average maturity of 5.6 years. Another widely advised approach is dividend-paying stocks through an ETF like iShares Select Dividend. You can collect around 3% in income and, with the economy looking healthy, could see share prices move up as well.

If Gundlach is right, though, you may do better in long-term bonds, REITs that do not own shopping malls, and maybe even junk bonds. His contrarian view is largely based on weak oil prices, which tamp down inflation worries, and on slowing economies and ultra-low bond yields overseas, which make the T-bond yield look fat. A strong dollar helps his case.

A year ago, Gundlach correctly predicted falling yields, weakness in junk bonds, and the end of the Fed’s bond-buying program. So far this year, he’s been right on rates again. So maybe the bond market isn’t as dangerous as it seems, and income investors can eke out another good year.

MONEY charitable giving

How Average Americans Can Give to Charity Like Billionaires

hand giving stack of cash
Paul Reid—iStock

Gifts from donor-advised funds, which act like foundations for ordinary folks, are growing faster than gifts from billionaires—and addressing critical issues like the Ebola crisis.

Forty-four donors gave gifts of $50 million or more to charity last year. The top 10 alone totaled $3.3 billion. But if you really want to know how America gives, look at the explosive growth of donor-advised funds, which have become a kind of personal foundation for Everyman.

Last year Fidelity Charitable, the largest donor-advised fund manager with $14.6 billion in assets, granted $2.6 billion to 92,000 charities. That was a record dollar amount, up 24% from last year and represents a nearly four-fold increase in 10 years. Meanwhile, the total of the 10 biggest gifts was down slightly last year and remains 20% below pre-recession levels, according to The Chronicle of Philanthropy.

In all, about 1,000 charities offer donor-advised funds and gift about $10 billion a year, according to National Philanthropic Trust. These charities have nearly $54 billion in assets. At Fidelity Charitable, individual gifts last year were as little as $50 and the average gift was $4,100, pointing up the Everyman aspect of these funds. Still, 277 gifts of a $1 million or more came from Fidelity Charitable as well.

Donor-advised funds allow individuals to set aside money on their schedule and realize the tax benefits immediately. The money cannot be taken back but the donor can choose when and where to disburse the funds. This is similar to the way large foundations work for the super wealthy. For example, last year’s largest charitable gift was a $1 billion bequest from Detroit businessman Ralph Wilson, who died in March—he left the money to his foundation, and his heirs will direct the donations.

At Fidelity Charitable, individuals can open a donor-advised account with as little as $5,000. About 60% of the accounts have balances below $25,000. Since the money cannot be taken back, it typically does not sit in the account indefinitely: 20% of assets are gifted each year and 90% are distributed as a grant within a decade, Fidelity says.

Other fund groups offer donor-advised options, including Schwab, which has a $5,000 minimum investment, and Vanguard, which requires $25,000 or more to get started. Many community foundations have set up donor-advised funds to meet local needs; to find a foundation near you, check out this locator.

Typically, individuals use donor-advised funds as part of planned annual giving. But because the funds are already set aside, donors also tend to respond to sudden needs. Fidelity Charitable distributed $5.5 million through more than 1,000 individual grants for Ebola relief last year. Almost all of that came in the fourth quarter—the height of the crisis. Wealthy donors get all the attention. But you don’t need a foundation to act like one.

Read next: How to Get the Most Bang for Your Charitable Giving Buck

MONEY Baby Boomers

The Last Boomer Turns 50—but This G-G-Generation Ain’t Done Yet

US musician Lenny Kravitz performs on November 23, 2014 at the Bercy concert hall in Paris.
Francois Guillot—AFP/Getty Images Lenny Kravitz—b. 1964—may have crossed the half-century mark, but he and his young boomer peers aren't done changing the world.

These days it's all about millennials. But boomers will not go quietly.

Nineteen years ago the first baby boomer turned 50, and a barrage of headlines marked the aging of America. As this year began, the last boomer had just turned 50—and few seemed to notice. Could it be that boomers are officially old news?

God knows we’ve spilled barrels of ink chronicling the generation that in its youth simply wanted to turn on, tune in, and drop out. We obsessed over every boomer adult life phase, from the day they finally started trusting people over 30 through the onset of their retirement years. What is left to say?

I’m a boomer. I’ve written two books about boomers. My g-g-generation has changed a lot of rules. We stood for civil rights and sexual liberation and against war, our megaphone amplified by our unprecedented numbers: 78 million strong. Our women went to work outside the home. We decided not to wear ties on Friday. We turned into workaholics who made the office our second residence and pursued the American Dream to the finish.

We’ve been selfish at times, showing the world how to live for today and run up our credit cards in the process. Free spending is part of what gave us influence as marketing companies sought to give us whatever we believed we needed. But a fair chunk of our materialism vanished in the Great Recession, and with age we’re finding that we already have most of the things we really need.

We will continue spending, of course—on meds, cruise trips, and Depends—even if it means taking out a reverse mortgage like ones The Fonz, the eldest of our generation, hawks on daytime TV. Yet leisure travel and pills aren’t economic drivers, not like real estate, infrastructure, and technology. Boomers are stuck on email in a SnapChat world. And the ultimate boomer buzz kill may be that we’ve begun to die. Our numbers have fallen 4% to 75 million, according to U.S. Census estimates.

Meanwhile our coddled, diverse, highly educated, do-gooder, multitasking tech-dweeb children who can’t seem to launch are finding their place at center stage. I can say this. I have three. I love every aspect of what they bring to the world. They are new and fascinating and driven in their own way. These millennials number 80 million, surpassing boomers in a key metric that now makes them prime grist for the marketers’ mill and guarantees sociologists and demographers will analyze and fuss over them for decades.

That’s as it should be. Millennials are the next pig in the python. Their numbers will reshape life phases again as they marry, parent, set up house, pursue careers, and retire. Already their influence has changed the workplace as they value meaning and experience more highly than loyalty and advancement. Millennials are upending the hotel and auto industries, real estate, and more with a sharing economy. I can’t wait to see what comes next.

But let’s not bury the boomers too quickly. For one thing, those past age 55 control 75% of America’s wealth. Well fortified, this generation is not ready to call it a day. Healthcare, which we will spend a fortune on in coming years, is 17% of the economy and one key area where boomers remain agents of change. We may be older but we will pay up to look good and feel good. We may be tech challenged but we’ll buy smart shoes to help us find the way home after the onset of dementia.

We haven’t finished changing retirement yet, either. Like The Fonz, who found an encore career as a pitchman, boomers living to 88 or 92 cannot imagine (or afford) 30 years of leisure. We are only beginning to reshape these last decades of life through phased retirement schemes, late-life careers, and business startups. We are exploring financial products like deferred annuities and 401(k) plan investments that convert to lifetime income so we don’t run out money. Financial institutions are only starting to focus on millennials; to them, boomers remain highly relevant.

Part of this new retirement is also about giving back. Boomers who wanted to change the world as twentysomethings but let life get in the way for three decades are returning to their activist roots and opening new doors in the world of philanthropy through mentoring programs and launching their own nonprofits. With life experience and more connections, and with greater influence, wisdom, and resources, we are finding it easier to make a difference without making the evening news.

Finally, boomers will be heard from one more time on the biggest issue of them all: how we die. Ours will be the first generation to broadly eschew painful life-extending procedures and make the most of palliative care to live better in fewer days, and then die with dignity. Our pursuit of a good death—checking out on our terms and saying no to becoming a burden on loved ones—will have broad implications for the legal system, retirement and estate planning, medical science, and hospitals and eldercare facilities. This is truly the last frontier, and boomers are pushing through the weeds. We may be old news. But we ain’t done yet.

 

MONEY Aging

Why Confidence May Be Your Biggest Financial Risk in Retirement

portrait of aging woman
F. Antolín Hernández—Getty Images

Seniors lose ability to sort out financial decisions but hold on to the confidence they can get it right.

You think it’s tough managing your 401(k) now, just wait until you are 80 and not quite as sharp as you once were—or still believe yourself to be.

Cognitive decline in humans is a fact. It starts before you are 30 but picks up speed around age 60. A slow decline in the ability to think clearly wasn’t an issue years ago, before the longevity revolution extended life expectancy beyond 90 years. But now we’re making key financial decisions way past our brain’s peak.

Managing a nest egg in old age is the most pressing area of financial concern, owing to the broad shift away from guaranteed-income traditional pensions and toward do-it-yourself 401(k) plans. Older people must consider complicated issues surrounding asset allocation and draw-down rates. They also must navigate an array of mundane decisions on things like budgets, tax management, and just choosing the right cable package. Some will have to vet fraudulent sales pitches.

About 15% of adults 65 and older have what’s called mild cognitive impairment—a condition characterized by memory problems well beyond those associated with normal aging. They are at clear risk of making poor money decisions, and this is usually clear to family who can intervene. Less clear is when normal decline becomes an issue. But it happens to almost everyone.

Normal age-related cognitive decline has a noticeable effect on financial decision making, the Center for Retirement Research at Boston College, finds in a new paper. Researchers have followed the same set of retirees since 1997 and documented their declining ability to think through issues. Despite measurable cognitive decline, however, these retirees (age 82 on average) demonstrated little loss of confidence in their knowledge of finance and almost no loss of confidence in their ability to manage their financial affairs.

Critically, the survey found, more than half who experience significant cognitive decline remain confident in their money know-how and continue to manage their finances rather than seek help from family or a professional adviser. “Older individuals… fail to recognize the detrimental effect of declining cognition and financial literacy on their decision-making ability,” the study concludes. “Given the increasing dependence of retirees on 401(k)/IRA savings, cognitive decline will likely have an increasingly significant adverse effect on the well-being of the elderly.”

Not everyone believes this is a disaster in the making. Practice and experience that come with age may offset much of the adverse impact from slipping brainpower, say researchers at the Columbia Business School. They acknowledge inevitable cognitive decline. But they conclude that much of its effect can be countered in later life if problems and decisions remain familiar. It’s mainly new territory—say mobile banking or peer-to-peer lending—that prove dangerously confusing.

In this view, elders may be just fine making their own financial decisions so long as terms and features don’t change much. They will be well served by experience and muscle memory—and helped further by smart, simplified options like target-date mutual funds and index funds as their main retirement account choices. The problem is that nothing ever really stays the same. Seniors who recognize the unfamiliar and seek trusted advice have a better shot at keeping their finances safe throughout retirement.

Read next: Why Your Employer May Be Your Best Financial Adviser

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