Aging alone causes seniors* to make worse financial decisions even when dementia is not present and the senior is in good health. It isn’t a lack of available education that causes seniors to make less than optimal decisions–which means all the financial education resources in the world won’t eliminate the problem. And the decline is specific to financial decisions–our ability to make optimal financial decisions declines at a faster rate than our ability to make other decisions. For some reason, processing financial problems is in a mental category all by itself.
These conclusions are from results obtained from the 4000 person Kariv and Silverman study on aging and cognition published last year;1 I’ve written about this study before because it has strong implications. One is a concern whether seniors will have the mental stamina to continue to be able to capably manage their investment portfolio over the years. A second implication is that financial information needs to be designed and presented in a manner that makes it easier to understand the information–a belief I supported but whose effectiveness is contradicted by new evidence. Another implication is that there is a greater need for financial professionals that will work with seniors to help them avoid bad decisions–however, even here there are stumbling blocks.
The solutions typically proposed to help seniors make decisions are based on the belief in rational economic man–we will make the best decision if given all of the pertinent facts about all of the possible choices. A large part of the senior solution is based on making financial education available. However, the education is compromised if not only does our ability to learn financial concepts decline, but we lose some of the abilities we had. In addition, we typically refuse to accept that our ability to make optimal financial decisions has declined, so we refuse both the education and the advice of financial professionals. This is especially true with the robo-advisors that have been suggested as a cure-all in lowering costs and enhancing financial literacy. But Keane and Thorp2 found “online and automated advice, appear to be unattractive to the less sophisticated consumers who could potentially benefit the most.”
The regulators are big fans of more and more disclosure and choices. The problem is aging causes our brains to get overloaded with data more quickly–in one study when the number of choices went from three to twenty the odds of making the correct choice fell by a factor of ten. To fight the overload problem I believed decisions would be aided if the presentation of data was standardized and only the most relevant facts were highlighted...I was wrong. When data delivery is standardized and condensed consumers focus on the unimportant data when making the decision and ignore the important factors such as fees. More choices and more data greatly increase the odds of making a bad decision.
Since our ability to make the best decisions declines as we age, the indication here is that “set it and forget it” retirement income tools–such as fixed annuities paying a guaranteed income at some point–are more appropriate and more needed from a cognitive view as seniors age. But this runs into problems too. A key one is people underestimate their life expectancy by five years on average and this translates into lower demand for lifetime income solutions. The other problem relates back to seniors not being as sharp as they were. The Keane and Thorp paper found “stock picking and diversification skills of investors in their sixties and seventies drop off sharply compared with middle age,” but if the seniors won’t accept this fact they will ignore less risky solutions, like annuities, and continue managing their risky investments with less acumen over time (and be more susceptible to scams).
What we have is a nation where over half of seniors don’t and will never have the needed financial education to make better decisions, coupled with a reality that even the financially literate lose their ability over time to make optimal decisions. What can agents do? Even though it is difficult, work even harder to help consumers understand the value of guaranteed annuity income.
*Those that are sexagenarians and above can be referred to as the elderly, the aged, geriatrics or retirees. I use the term seniors with the belief that a true senior is a person at least a decade older than I am.
1. S. Kariv & D. Silverman. 2015. Sources of Lower Financial Decision-making Ability at Older Ages. Michigan Retirement Research Center Working Paper WP 2015-335
2. Keane, M.P. and S. Thorp, 2016. “Complex Decision Making: The Roles of Cognitive Limitations, Cognitive Decline and Ageing”. The Handbook of Population Ageing.
provides research and consulting services to insurance companies and financial firms in a variety of annuity areas. He also serves as director of research for the National Association for Fixed Annuities and as a research fellow for Webster University. In 1994 he wrote a book to help banks market investment and insurance solutions to their small business clients. In 1996 he produced the first independent hypothetical return monthly publication comparing all index annuities on the market, and in 1997 created the first comprehensive report of index annuity sales, products and trends, "Advantage Index Product Sales & Market Report" (quarterly). His insights on the annuity and retirement income world have appeared in hundreds of publications. In 2006 the National Association of Insurance Commissioners asked him to address their annual meeting and teach regulators the realities of index annuities. He was invited back in 2009 to talk to the NAIC about the effects of aging on senior decision-making. He is a frequent speaker at industry functions. Prior to forming Advantage Compendium, Marrion was president and owner of an NASD broker/dealer with offices in nine states. Previous to that he was vice president of a life insurance company and vice president of an NYSE investment banking firm. He has a BBA from the University of Iowa, an MBA from the University of Missouri, and a doctorate from Webster University. Marrion can be reached at Advantage Compendium, 2187 Butterfield Court, St. Louis, MO 63043. Telephone: 314-255-6531. Email: firstname.lastname@example.org.