Cognitive Aging Could Severely Reduce Financial Capacity

Financial novices are at major risk of diminishing decisionmaking capacity at the critical age of retirement, a study finds.

Most people loose “fluid intelligence,” or the capacity to process new information, as they reach their 70s and 80s, according to a new study by the Center for Retirement Research at Boston College (CRR).

This puts retirees not versed in effective money-management skills at risk of losing their ability to manage financial affairs in their own best interest. In fact, the CRR study found that “financial novices” in particular may need substantial guidance in managing their assets as they reach retirement age. 

The challenge is obviously even greater for people who are at risk of developing severe cognitive impairments, which the CRR projects will grow to more than a third of people reaching their 80s. The combined decline in fluid intelligence and diminishing financial capacity can make these groups especially vulnerable to fraud and financial abuse, highlighting the need for a trustworthy professional to step in.

The CRR says most financial novices will bounce back with the right guidance. It also concludes that most people in their 70s and 80s will still be capable of making sound financial decisions because financial capacity relies largely on accumulated knowledge, which remains intact for people experiencing normal cognitive aging. This knowledge is reinforced through financial actions such as understanding how to read, pay and dispute bills; knowing when and how to use a check; and understanding concepts like debt, insurance, and asset returns.

These findings are of particular interest considering the wealth of research on how financial wellness remains a challenge for a large number of Americans. Moreover, financial judgement which aids in the ability to detect fraud and other risks requires a combination of accumulated knowledge and fluid intelligence. This puts people suffering from deficiencies ranging from mild cognitive impairment to full-blown dementia at real risk. The latter is most common among people in their 80s and 90s, the study finds. This is particularly concerning as several studies show Americans’ longevity is increasing. Advisers with clients undergoing mental dips should pay particular attention to how these individuals comprehend financial tasks.

Even those suffering from early stages of dementia have trouble performing tasks requiring financial judgement, the study finds. One study cited by CRR found that 95% of adults with no cognitive impairment were able to manage their finances compared to 82% with mild cognitive impairment and just 20% for those suffering dementia.

CRR’s research also found that most people suffering cognitive impairment are unaware they are slipping and remain highly confident about their money-management skills. Advisers can better pinpoint levels of financial capacity using a variety of performance assessments to determine how capable clients are of managing their finances. There are also plenty of ways plan sponsors can address cognitive decline.  

The full CRR brief on “Cognitive Aging and the Capacity to Manage Money” can be found at