whealthcare report 13

When does financial decision-making capacity peak?

Posted by Chris Heye, PhD on Apr 25, 2018 10:51:30 AM
Chris Heye, PhD
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Most of us would agree that the ability to make good financial decisions peaks at some point in our lives and then declines. As we get older, financial decision-making is often compromised by health problems, new medications, dementia, or simply normal aging.

But when does "peak capacity" for financial decision-making occur? Clearly it will be different for different people. But on average, what would you guess? Age 75? 65? 55?

Unfortunately, a lot sooner than many of us would like to think. A study by Harvard researchers entitled The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation has some cautionary findings. The goal of the study was to estimate the age at which financial decision-making reaches its peak, as measured by the number of financial calculation mistakes. Financial mistakes included sub-optimal use of credit card balance transfer, mis-estimation of the value of one’s house, and excess interest rate and fee payments.

Looking across all measures, the authors concluded that financial mistakes follow a U-shaped pattern, with the cost-minimizing performance occurring around age 53(!).

Uh oh. Adults over age the age of 55 own approximately 80% of the wealth in the United States. This suggests that the majority of financial assets in the US are controlled by people whose capacity to make good financial decisions is already on the decline.

This is why we recommend that everyone starts proactively planning for aging early. Beginning at age 50, "bad things" can happen, and flawed decisions are more likely during periods of stress or emotional/physical instability. So we suggest that everyone over the age of 50 have a Financial Caretaking Plan, as well as a baseline Whealthcare Risk Profile score that measures the capacity to make good financial decisions.

We understand that planning for successful aging entails sensitive conversations and difficult decisions. But we also believe that most older adults desperately want help with age-related financial challenges, even if they are not always able to clearly articulate their needs. We will therefore devote (many) future posts to case studies describing the successful application of our tools. Stay tuned.

A health and longevity planning blog


Chris Heye, PhD

Whealthcare Planning Founder

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