The Biggest Financial Risk for Boomers
What's the biggest financial risk for Baby Boomers? You might think the stock market, and you aren't completely wrong. But what about historically low bond rates? That’s actually much less of an issue than people think. Or what about long-term care insurance? Yeah, but at least there is Medicaid as a (terrible) last resort. So, what’s the biggest risk?
It’s cognitive decline. The risk of mild dementia rises from a combined 12% for ages 70 to 74 to 45% for those 80 to 84 and goes higher as we age. People live an average of six years after diagnosis. Even a mild decline can be disastrous for finances; financial decision-making is one of the first areas to go.
Even with a working brain, it’s difficult to deal with the issues of retirement; required minimum distributions (RMDs), adapting your asset allocation as your expenses change and markets swing, navigating Medicare and ‘Medigap,’ long-term care costs, and the endless stream of charlatan products and ideas eager to take your money!
The big custodians: Vanguard, Fidelity, and Schwab are working on ways to detect cognitive decline among their clients by listening for keywords, watching for mistakes that look like impairment, and a lot of training. Financial advisors are ensuring they have ‘trusted contacts’ in addition to powers of attorney or trusts.
It’s a huge problem for the finance industry because there are two fundamental laws that every bank, planner, custodian, and brokerage have to follow, 1) do exactly what the client tells you to do and 2) don’t share any information about the client with anyone else. But they could also be found liable if it is determined that the client had diminished capacity, executed the instruction, and the firm did not have enough policies and procedures in place. (Lifetime Financial has such a policy and procedures.) This puts advisors, brokerages, and banks in the difficult position of evaluating cognitive decline.
Some of the current federal laws and regulations are good but don’t go far enough. States are adopting stricter requirements, led by the national state regulation association NASAA. These go a step further and require brokerages, banks, and financial advisors to report cases where financial exploitation of the elderly or diminished capacity is suspected. Maryland is one of about 20 states that has adopted this model regulation.
What can you do? There are three primary defenses if you or someone you know is elderly and may experience diminished capacity. Unfortunately, all of them require work ahead of time:
Establish a power of attorney or a trust. This is essential.
Give your planner, bank, or brokerage a ‘trusted point of contact’. These are new roles that allow someone concerned to ask the trusted contact about the client’s capacity without violating privacy statutes.
Simplify your finances! There’s rarely good reason for financial complexity late in life.