Wednesday, December 11, 2013

Financial Savvy Peaks at Age 53?

So say some:

Financial Savvy Peaks at Age 53: What to Do When You Get Stupid
[...] Lew Mandell: As we move through middle age, our ability to manage our finances tends to peak, on average, shortly after our 53rd birthday, and declines thereafter. By the time we hit 70, this rate of decline steepens precipitously. This is the opening theme of my new book "What to Do When I Get Stupid."

The relationship between age and financial capability is a function of two offsetting aspects of intelligence. As we get older, experience makes us better able to cope with a variety of familiar problems. This is called "crystallized intelligence." However, past the age of 20, the analytical ability we need to perform new tasks declines steadily. This is called "fluid intelligence." Since the intelligence we gain from experience increases more and more slowly after some three decades of adult experience, our steadily declining fluid intelligence ultimately offsets the gains from experience, causing most of the decline in our mental capacities including financial capability. (Check out Paul Solman's animated explanation of Harvard's economist David Laibson's graph demonstrating this relationship and see Making Sen$e's full segment below.)

At a certain point, declining "fluid intelligence," or our analytical ability, offsets gains in our experiential intelligence, putting our financial decision-making at risk.

Adding to this decline is the beginning of age-related neurological problems including dementia and other types of cognitive impairment. Overall cognitive impairment affects 21 percent of us in our 70s, increasing to 53 percent of those in our 80s and 76 percent of those over 90.

The ability to make investment decisions has been found to peak at about age 70, somewhat later than other types of financial decisions such as those that relate to the use of debt. This is probably due to the fact that many adults focus on their investments only later in life when they have both assets and the time to think about them. Experience with investments tends to come later, thus abilities peak later.

Unfortunately, studies have found that as people get older, their confidence in their abilities to make good investment and insurance choices actually increases as their measured ability decreases, leading to the likelihood of poor outcomes. [...]
The rest of the article talks about what you can do about this, as well as embedded links to other articles with retirement advice.

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