Building a relationship with clients' families can help advisors manage issues with cognitive decline. (Illustration: Ellen Weinstein)

For an aging population, cognitive decline is an unnerving challenge. The average 65-year-old will live into his or her mid-80s. Affluent individuals have actuarial life expectancies beyond the averages, and often have complex financial considerations requiring high levels of cognitive function. The potential for cognitive decline is an important consideration for financial advisors and estate planners.

Dementia is the loss of mental function severe enough to impair a person’s daily life. Estimates indicate that nearly 15% of Americans over age 70 suffer some form of dementia, according to a 2013 study by Joanne Hsu and Robert Willis.

According to the Mayo Clinic, mild cognitive impairment (MCI) is an intermediate stage between the expected cognitive decline of normal aging and the more serious decline of dementia. It can involve problems with memory, language, thinking and judgment that are greater than normal age-related changes. Individuals with MCI may be aware that mental function has “slipped.” Family and close friends also may notice changes, but they often aren’t severe enough to interfere with day-to-day life and activities.

Among 71- to 79-year-olds, 16% suffer from cognitive decline that falls short of dementia, increasing to 39% of those age 90 and older. In total, about half of 80-year-olds suffer from dementia or MCI, a 2010 Center for Retirement Research at Boston College (CRR) study found.

The importance of planning for cognitive decline is associated with the complexity of each family’s finances. A family with fixed sources of income may have less at risk than a family with accumulated assets that require individualized management, and more complex medical and estate planning considerations.

Economist and Harvard University Professor David Laibson investigated these concerns and found clear trends based on data tracking the ability to retain and recall facts. He noted that when interviewees in the University of Michigan Health and Retirement Study were asked to immediately recall words from a list of 10 simple nouns, the difference in accuracy between age groups was striking. At age 51, the average performance was 6.2 words out of 10. By age 90, the average (controlled) performance was three words out of 10, according to CRR.

Implications

Studies of decision making have identified tendencies of older consumers to make poor financial choices compared to middle-aged consumers.

One such study found that financial literacy scores decline by about 1% per year after age 60, CRR found in 2015. The annual Rush Memory and Aging Project, for example, assesses cognition individuals in the Chicago metropolitan area to identify the impact of cognitive decline on financial literacy, confidence in the ability to manage money and willingness to seek help in managing finances. At the time of the initial assessment, individuals were able to answer most questions correctly, were reasonably self-confident and were primarily responsible for managing their own finances.

Declines in cognition led to lower financial literacy scores — but despite the decline in general levels of self-confidence, confidence in managing finances remained high. The “stickiness” of confidence in managing finances may indicate that older individuals fail to recognize the impact of declining cognition on their financial decision-making ability. Although older individuals are, according to the survey, reluctant to give up control, it did indicate that those with declining cognition were willing to seek some degree of help from others.

What to Do About It

With more than 14% of the U.S. population now over age 65, finding the best way to keep personal finances secure and organized is a goal shared by a wide cross-section of families and professionals.

There isn’t a widely used measurement system for cognitive decline, which complicates the task of identifying whether an individual is impaired enough to need help. Look for changes in demeanor, behavior or personality to identify potential indications of cognitive decline. People who are typically on top of everything may become scattered or disorganized, or may forget recent conversations. Document what you are noticing to confirm a pattern of behavioral change and support what may be a difficult conversation with the client and family.

Understanding the realities of aging helps families prepare, especially when financial and personal legacies are at stake. Protecting against the financial consequences of cognitive decline includes establishing trusts, assigning power of attorney to family members or transitioning duties to professional third-parties.

Making the transition to a team-oriented financial support system is both emotionally complicated and liberating. Whether triggered by a client’s life event or simply embraced as part of a forward-thinking plan, advisors should consider three steps: opening lines of communication, formalizing a plan and creating a checklist to ensure critical needs are covered.

Communication Within the Family

The idea of sharing information is greeted differently from family to family, as dynamics among parents and siblings can create long-term financial and emotional complications. Some families limit financial transparency to bill payment and basic budgets, while others are fully transparent about their finances. Defensive conversations and unpleasant financial surprises can cause rifts; advisors should prioritize items to share or create a simple checklist of providers and accounts (as detailed below).

Living wills and medical directives can provide guidance on how to handle certain medical situations. A durable power of attorney for health care appoints a person to make health care decisions, and can be structured to become effective only upon incapacity. A durable power of attorney for property can provide continuity of decision making for business or personal affairs. Other considerations best handled before the onset of cognitive decline include gifting strategies, trusts and insurance planning. The process within the family calls for formal documentation and introductions to advisors to ensure a seamless transition when a new decision maker is asked to manage the estate.

Without forethought and open communication, decisions could end up in the purview of state government. Families that are able to communicate internally will avoid this snare and be empowered when the time of transition arrives.

Planning With Confidence

The delicate nature of cognitive decline underscores that a family’s true financial situation goes beyond portfolio performance. Estate planners should encourage families to create a plan that captures their life goals, not just their financial outlook.

Before urgent help is required, financial and estate plans should be stress-tested based on the potential long-term impact and cost of home health care, nursing homes and other potential expenses. Those plans should be reviewed at least every few years to ensure that new developments are taken into consideration. When financial, investment, estate and medical plans are in place prior to cognitive decline, transitions become more fluid and less combative. A trusted financial advisor will already know the family and can quickly coordinate action steps for relatives and other professional advisors.

As new generations within a family mature, the complexity of their personal financial vision evolves dramatically. Those who are helping aging parents on one side and rapidly growing children on the other must be educated and prepared to meet challenges head on.

— Read “When Sentiment Conflicts With Investing Reality” on ThinkAdvisor.

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