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BLOG: Managing your retirement finances against the risk of cognitive decline

Emma Lunn
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Emma Lunn

We are fortunate to be in a time where people are living longer. However, it does means we also run a growing risk of mental decline. It’s a difficult subject to broach, but also a difficult one to ignore when thinking about managing your finances over your investment lifetime.

It’s estimated that between 5% and 20% of people aged over 65 have ‘mild cognitive impairment’, according to Age UK. This means they can live happily, independently, but are mentally less proficient than would otherwise be expected for a healthy person of their age.

More known unknowns

Effective financial planning in retirement means acknowledging that the risk of cognitive decline, were it to become a reality, might work against your financial self-interests.

The challenge is similar, in some respects, to the one you might face if you were affected by a sudden illness, and you lost the capacity to make important decisions for yourself. Under such circumstances, you may well think that your nearest and dearest would automatically be able to look after your finances and decide on the care you can receive. But the truth is more complicated as they might not have the authority to do so unless you have a power of attorney in place.

It’s also very different insofar as a mild cognitive impairment would still leave most people able to act independently – albeit in a way that is potentially detrimental to them, just when they are most reliant on their investments. It might make them more vulnerable to fraud too.

How pre-emptive do you need to be?

To get a sense of the importance of thinking pre-emptively about the risk of cognitive decline, we canvassed almost 2,500 Vanguard investors aged 55 or over in the US.

Our aim was to find out how investors perceive the risk of cognitive decline, how they plan to mitigate the possibility of cognitive decline and what the consequences of mistiming any transfer of responsibility might be.

What we found was a huge spread of responses, underlining just how personal a matter it can be. When investors were asked what risk they thought they were at of suffering cognitive decline in the next one or five years, the answers ranged from 0% all the way to 100%.

We also asked respondents to choose from a list of actions they had undertaken to help manage the risk of personal cognitive decline. In each case, almost three-quarters said they had a living will and a power of attorney in place. The responses varied by age highlighting how investors become more conscious of their cognitive limitations as they get older.

Intriguingly, there was a plateauing after age 65 in their efforts to consolidate different accounts. It’s fair to say that bringing your investment accounts together is likely to make managing your finances less complicated and probably also make it easier to transfer this management to someone else. Consolidating different accounts could even help you make your pension go further by giving you greater clarity over your finances and, potentially, lowering your costs.

Transferring control?

The hardest question of all – when to transfer control of your finances to a child, sibling or other trusted agent – drew the biggest consensus. More than eight out of 10 Vanguard investors surveyed indicated that they thought the ideal time to execute a hypothetical transfer would be sometime after they had begun to experience some cognitive decline but before they became completely incapable.

Yet what if there was no power of attorney already in place? After all, it is unclear how much capacity any of us might have if ever diagnosed with, or conscious of, some cognitive impairment, and to register a lasting power of attorney in England and Wales an independent ‘certificate provider’ must verify that you know what you are doing. Otherwise, the Court of Protection might need to get involved, which would likely be a more drawn-out process and potentially costly too.

Even with the right documentation and trusted agent named, those polled recognised that it would still be a difficult transition to manage. On balance, they thought there was a greater than one-in-three chance of a mistimed transfer because some could imagine themselves being reluctant to relinquish control.

A mistimed transfer of control could have a material financial consequence for investors. Some respondents expected little impact, but others, when asked how much such a delay might be worth to them, reckoned more than 30% of their net wealth.

Cognitive decline requires planning

Preparing for cognitive decline requires planning. It involves not only having legal documents in place but also holding conversations with family members, providers and experts so that your financial and/or healthcare needs and desires are expressed and captured in advance of incapacity. In doing so in advance of its possible onset – could give you a greater sense of ownership and control over your plans.

Many of us will probably never be affected by the issues raised here. Some of us, though, will. It’s a known unknown, and a very difficult one at that. But this is more reason to think about it when managing your investments.

James Norton is head of financial planners at Vanguard Europe