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Wednesday, July 13, 2011

Cognitive decline can have hazardous affects on boomer wealth

As Baby Boomers age, policy makers and economists may be served by looking at the condition of not just their nest eggs, but the health of their brains.

The late Brooke Astor is an example of the dangers of declining cognitive function.
So says economist David Laibson, of Harvard University in a speech called “The Age of Reason.” Prof. Laibson spoke at Morningstar’s annual conference in Chicago before hundreds of financial advisers and asset managers — industries grappling with the inevitable shift of assets from workers accumulating money to those trying to live on it as they grow older.

Prof. Laibson opened with an image of the famously wealthy Brooke Astor. “One of our most remarkable individuals ended up in this terrible state” because of a lack of cognitive abilities, he said.

About 35% of wealth is controlled by those 65 or older, Prof. Laibson said, and that number will grow as boomers age. The total balance sheet of U.S. households is $53 trillion, he says. As about $18 trillion hang in the balance among seniors, the question is, what will be done to help aging people from becoming another Brooke Astor?

Fluid intelligence — that is intelligence displayed in things like memory tests — decreases dramatically with age. In fact, “it’s all downhill from age 20” Prof. Laibson said. “What about the 80-year-olds? It’s the 80-years-olds who have the million dollar IRAs. Not the 20-year-olds.”

But clearly, there’s a lot more to life than fluid intelligence. Crystallized intelligence — memory, wisdom and so on — does increase over time, but less so, on average, in senior years.

All told, the point at which we make the best financial choices is 53 years old, according to his data. “Of course there are exceptions,” Prof. Laibson said. “I would take Warren Buffett at 81 over most 50-year-olds.” (But he also acknowledges he would take a fiftysomething Buffett over one in his 80s.)

Many seniors end up in a state called cognitive impairment without dementia that isn’t quite dementia, but still (as the name implies) a deterioration of memory. In spite of this, people still may make financial decisions on their own. Prof. Labison estimated that 16% of those 71-79 years old, 29.2% of 80-89 year olds, some 38.8% of those over 90 years old are in such a state.

Those people are at great risk for financial abuse. Some 17% of professional care staff report committing psychological abuse and 10% physical abuse, Prof. Laibson said.

Those over the age of 50 end up paying higher interest rates, even though on average they had better FICO scores and lower default rates, Prof. Laibson said. “Middle aged people get better deals,” he said. In terms of risk-adjusted returns on investments, the young do relatively well, but the “old are doing absolutely abysmal,” paying more in fees and suffering from poor asset allocation, he said.

Prof. Laibson called for keeping things simple for clients, while still giving them a sense of control. He called on policy makers to expand a fiduciary duty for financial advisers and expand regulations requiring power of attorney for the elderly.

That overoptimism about mental muscle keeps people from asking for help. “We procrastinate. We don’t like complexity… We have bad memory and we don’t know the extent of our bad memory,” he said.

Re-print from the WSJ June 10, 2011. Written by Mary Pilon

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