The overlooked retirement security risk that must be addressed

Age-related cognitive decline is the stigmatized yet growing threat to retirement security that “can undermine even the most well-constructed financial plan” if it goes unaddressed, said Chris Heye, research fellow at the LIMRA Retirement Income Institute and CEO of Whealthcare Solutions.

Heye told InsuranceNewsNet that decision-making risk due to age-related cognitive decline, such as Alzheimer’s disease or dementia, is increasingly a concern as people live longer. 

“Historically, when we think about retirement and retirement risk, we think mostly about things like sequence of return risk or inflation — sort of what I call ‘market-related risk,’ risks that are more or less external to the retiree or beyond their control. We just assume that they’re going to make good decisions within that environment and that the risk primarily stems from these external factors,” Heye said.

“But with people living longer, I believe that it’s introducing new sources of risk, and one source of risk is what I call ‘decision-making risk.’”

He acknowledged that this can be a sensitive matter for financial professionals to address with their clients, given the stigma that still surrounds cognitive decline in older adults.

However, he maintained that “the only thing harder than talking about cognitive decline is not talking about it.” 

And, in his experience, clients “may be hesitant to bring it up” but are “very grateful” when their advisor talks about it because “these issues are top of mind, and many clients actually want to talk about this.

“I do feel the stigmas around cognitive decline and health issues are going away a little bit, simply because this is life. When you get in your 60s and 70s, this is your life, and there’s no avoiding it. In many cases, the clients recognize how important this is and the threats that these health-related issues pose to their personal finances,” Heye said.

The ‘irony’ of retirement

Heye suggested the “irony of retirement is that many of us have accumulated the largest amount of resources in our lives and have to make decisions about those resources precisely at a time when we’re becoming less and less capable of making sound financial decisions.”

He pointed out that age-related cognitive decline is a fairly common and natural occurrence, with around 11% of American adults over age 65 living with Alzheimer’s disease, the most common form of dementia, according to data from the National Institutes of Health. 

A 2009 study published in the Brookings Papers on Economic Activity suggested the peak age of financial decision-making was 53 — “well before retirement ages of 63 or 73,” Heye underscored.

Accordingly, seniors can be at greater risk of costly financial fraud, errors in judgment and poor decision-making if cognitive decline sets in.

This is especially the case in an age of artificial intelligence, where bad actors are using “ever more sophisticated forms of financial exploitation, and frequently aim at older adults.

“I’ve known friends whose parents have been scammed literally for millions of dollars from some combination of financial scam and poor financial decision-making. It’s a real issue, and it’s something that I think, with AI, it may only get worse,” Heye said.

He cited a recent study published by the National Bureau of Economic Research that looked at the net worth of families whose financial resources were managed by individuals experiencing age-related cognitive decline.

That research found a 25% decline in net assets over a period of five years, which Heye noted is “a lot more than the stock market usually goes down.

“The sad thing about this is, when markets go down, they come back up. For a lot of people, once you start losing capacity to make financial decisions, it doesn’t come back. So, in my view, these risks of poor financial decision-making as we get older are more significant than the risk of a downturn in the stock market or even a major recession,” Heye said.

How advisors can help

While financial professionals may not be able to influence their clients’ health, Heye said they can help in two ways:

1. Talk to clients who they believe may be experiencing cognitive decline

2. Recommend appropriate products that can help provide a safety net

Heye pointed out that one of the first signs of cognitive decline is a decreased ability to organize finances and make rational decisions. He said this means “financial professionals are really on the front line” and “may see signs of cognitive decline in their clients before their clients’ doctor does.

“It does put some onus on financial professionals to be more vigilant and to monitor the signs of cognitive decline in their customers. The other thing, too, is looking at annuities and other forms of protected income. These can provide what I like to call ‘cognitive insurance,’” he said.

In his view, financial professionals have a legal obligation to “protect your client from all financial risks, not just stock market risks.” This means having the difficult conversations when needed but doing so in a way that demonstrates empathy and shows “you and your client are on the same team.”