How Undiagnosed Cognitive Decline Eats Into Seniors' Retirement Savings

New research shows that undiagnosed cognitive decline can lead older adults to lose a lot of their retirement savings. This happens because they make poor investment choices or fall for financial scams.

Today's retirees live longer than those in the past. Because of this, they face a higher risk of memory loss. This is according to the study's co-authors, who are economics professors.

Many retirees now depend less on steady income from pensions or annuities. As a result, they often handle complex financial decisions on their own.

Franco Peracchi from Tor Vergata University in Rome says this situation raises the risk of financial mistakes. These mistakes can lower retirees' quality of life. This is especially true for those who invest in the stock market and do not notice their cognitive changes.

Peracchi points out, "While much attention has been given to teaching financial literacy to younger people, there’s a critical need to focus on older adults who manage significant savings in their later years."

Word Recall

Researchers looked at data from 1998 to 2014. This data was collected by the University of Michigan’s Health and Retirement Study. The study follows about 20,000 people aged 50 and older. These individuals represent the U.S. population.

Every two years, participants rated their memory from poor to excellent. They also noted any changes from the past two years. They were also asked to recall two separate lists of 10 words, giving each participant a memory score out of 20.

In this analysis, a memory score drop of 20% or more over two years was called a "severe memory-loss event." Over 16 years, more than 60% of participants had at least one memory decline. Most of this memory loss was due to normal aging, not conditions like Alzheimer’s.

The study found that serious memory loss can happen early, with an average age of 67. This often occurs before retirement. About 20% of participants experienced multiple memory-loss events throughout the study period.

Unaware vs. Aware

The study reveals that most older adults are often unaware of their cognitive decline. Among participants with serious memory loss, only 20% said their memory got worse in the last two years. Meanwhile, 77% thought their memory had not changed, and 2.6% felt it had improved.

The average net worth among participants was about $379,000, with a median of approximately $190,000. People who had significant memory decline without realizing it lost about $31,000 in wealth over two years. In contrast, those aware of their memory decline—or who did not experience memory loss—saw a much smaller average decrease, around $5,400, suggesting they were more likely drawing down assets in a controlled way rather than incurring losses due to poor financial decisions.

Some losses could be linked to scams, as older adults are known to be more susceptible to fraud. The data showed that the wealthiest 25% who did not know about their memory decline lost the most money. They were also actively trading in the stock market.

People who noticed their memory problems often reduced their risks. They did this by involving family or financial advisors in their choices. They also moved to safer investments.

“Many of the losses we observed stem from stock market activity,” notes Peracchi. “Individuals initially join the market with strong cognitive skills. When memory declines, they may remain overly confident in their abilities, unaware of their memory loss and, as a result, more vulnerable to significant financial setbacks.”

Bottom Line

As life expectancy increases, it is important for retirees and their families to understand how cognitive decline affects finances. This study highlights the importance of planning ahead.

This can be done by involving trusted family members or financial advisors. Doing so can help protect retirement savings. By focusing on cognitive health and making smart changes, older adults can better protect their wealth. This helps them keep their quality of life and lowers their risk of financial losses or scams.

Sources:

https://www.wsj.com/personal-finance/retirement/cognitive-decline-retirement-savings-4672b604

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information