We all understand that as we age, cognitive decline may set in. The problem is, we might not be aware of it happening until it's too late, which can disrupt decades of financial planning and put our retirement at risk. A recent study shows that how well we perceive our own cognitive decline significantly impacts our retirement success. It also reveals that wealthier investors actively in the stock market suffer the most from financial losses due to being unaware of cognitive decline.

Uncover the Hidden Financial Risks of Unrecognized Cognitive Decline

Understanding Cognitive Decline and Its Impact

We all know that cognitive abilities tend to wane with age. It's a natural part of the aging process. But the danger lies in not realizing when this decline is actually happening. This lack of awareness can have far-reaching consequences for our financial well-being. As the study shows, those who are unaware of their cognitive decline make bad financial decisions, leading to notable wealth losses. On average, over a two-year period, respondents who didn't recognize their cognitive decline saw their total wealth decrease by 8.2 per cent. And for the wealthier respondents in the unaware group, the losses were even more significant. The top wealth quartile saw a loss of US$92,983 when comparing those aware and unaware of their cognitive decline.

These are individuals who had previously demonstrated strong financial acumen. However, their confidence in their abilities remained intact even as their cognitive functions started to deteriorate. Overconfidence in investing has long been associated with underperformance, but when combined with unrecognized cognitive decline, it becomes a major liability. The continued overconfidence in the face of declining cognitive function makes them more susceptible to poor investment choices and financial scams, which can quickly erode a lifetime of savings.

The Importance of Continuity in Financial Planning

If you have a partner, it's crucial to think seriously about the continuity of your financial planning. If one partner has been more involved in managing investments and taxes, you need to consider what would happen if that person experiences cognitive decline without realizing it. Not only do you need to plan for their potential death, but also for this unexpected decline in cognitive abilities.

Another important measure is to designate a Trusted Contact Person (TCP). In 2021, Canadian regulators introduced this concept. A TCP is a person that your financial adviser or institution can contact if they notice signs of cognitive decline or suspect financial exploitation. It's not about giving this person control over your accounts; it's more like a two-factor authentication. For example, when traveling and trying to log in to certain websites, a secondary security protocol is triggered by the site noticing the new location and sending a code to your email or phone. A TCP works in a similar way. If your financial adviser or institution senses something odd, they can reach out to the TCP for peace of mind.

Taking Action to Safeguard Your Finances

It's time to reflect on your current approach to financial management. Are there areas where you could involve others more? Have you had open discussions with your partner or family members about the future? These are important questions to consider.

By taking the necessary steps now, you can make a significant difference in safeguarding your nest egg against the various challenges that lie ahead. Whether it's involving others in financial decisions or designating a TCP, these measures can help protect your wealth and ensure a more secure retirement.

Preet Banerjee is a consultant to the wealth management industry, specializing in the commercial applications of behavioural finance research.