Our last blog post explored diminished financial capacity, or the decreased ability to make sound financial decisions as we age due to cognition factors like dementia, Alzheimer’s or other illnesses. In this post we want to look at the numbers of seniors with cognitive impairments, what’s happening with these older investors and what families can do to help. We hope you find this information useful when putting together a plan for your aging loved one.
If demographic trends continue, the number of people with cognitive impairments (and in turn diminished financial capacity) will rise greatly in the coming years. By 2020, about 55 million baby boomers will join the older population. Within the elderly community, the number of people 85 and over is also growing quickly, and should reach approximately 6.6 million by 2020.
Alzheimer’s and other dementias are occurring more and more frequently. Trends predict that by 2050 there will likely be 13.5 million Americans 65 and older with Alzheimer’s. Other diseases are responsible for dementia, such as Parkinson’s or vascular dementia. Cognitive impairment gives people a lower quality of life, increased disability and increased neuropsychiatric symptoms, all of which contribute to the decrease of ability to make sound financial decisions.
Another trend equally important is that of responsibility. Retirement began to shift around 1980, from employer-sponsored defined-benefit (pension) plans to defined-contribution retirement plans (401(k), TSP, 403(b)). This means individuals are now responsible for their own security at the time of retirement. This bears some risk for individuals, so getting good financial advice and being able to understand it is more important now than ever.
When people have diminished capacity, it’s not an all or nothing situation. Capacity changes over time, even throughout the course of a day or day-to-day. People with dementia or Alzheimer’s have times of lucidity when their capacity may not be diminished.
One of the first abilities to decline as cognitive function declines is financial capacity. Financial capacity is just one area of cognitive function that a clinician, like a mental health professional or doctor, will assess when someone has impaired cognitive function. If you feel your loved one is showing signs of decline, it is best to have a medical assessment and to contact an attorney to assist in developing the necessary plans and documents.
There are some ways that you can be proactive and start helping now. For some, a joint bank account is a simple way to help a loved one pay bills without court involvement. Some people also look into obtaining a durable power of attorney. If your loved one has a mild cognitive impairment, she/he may still be able to designate someone as a financial agent even if she/he is not able to handle some business transactions. These advance planning tools can be viable as alternatives to guardianship.
Guardianship refers to a court giving a person or entity the power and duty to make personal or property decisions for another person. A judge would decide this based on someone’s diminished cognitive ability, if the judge determines the person can no longer make decisions for himself or herself. This is a last resort, however, because the process can be expensive and time-consuming, and it takes away a person’s basic rights. Powers of attorney are typically preferable because they allow the person with cognitive impairment to still have some autonomy while the person with power of attorney assists in making decisions.
At the heart of these issues is that of trust. Who will take the best care of your loved one, should diminished financial capacity develop? Who can you trust to act in the best interests of your loved one? It is clear that a team is needed to protect the rights of your loved one and prevent financial abuse. Outside of the family, a trusted financial advisor and attorney are good places to start.
We will continue this discussion next week when we address elder financial abuse, how to spot it and how to prevent it.
Wood Smith Advisors, a Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.
“Finance Made Simple” blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.