A new study shows that retirees remain confident that they can manage their finances even as numeracy and financial knowledge decline with age

One of the less studied impacts of the transition from defined benefit retirement plans and more complicated plans, such as a 401(k), is that it requires people either to make sound financial judgments as they age or to know when to reach out for help. But most people are confident that they can continue managing their own affairs even after significant cognitive impairment.

“Declining cognition has a noticeable adverse effect on financial literacy, but not on individuals’ confidence in managing their finances. Perhaps not surprisingly then, more than half of those experiencing a significant cognitive decline retain primary responsibility for managing their finances,” write Keith Jacks Gamble of DePaul University with Patricia Boyle and David Bennett of Rush University Medical Center in their paper How Does Aging Affect Financial Decision Making?

As cognition declines, confidence in managing finances doesn’t budge

Previous studies have found that financial literacy and investment skill usually start to decline around age 60, but these studies compared people at different ages which adds some ambiguity to the results. To get around that problem Gamble, Boyle and Bennett surveyed hundreds of retirees and then zeroed in on the 377 of them (average age 83) who showed signs of declining cognition but who were not diagnosed with any form dementia.


The surveys have numeracy questions ranging from simple arithmetic up to compound interest problems, and the financial knowledge questions test whether people understand the relationship between bond prices and interest rates, rates of returns for stocks and bonds, and other investing basics.

They were then asked to state how confident they were in each answer and, separately, how confident they are in their own abilities. What’s fascinating is that as people’s cognition declined, they became less confident in the specific answers, but confidence in their ability to manage their finances hardly budged.

Lack of self-awareness doesn’t just affect retirees

The study results are worth bearing in mind for anyone with an aging parent, but if you view it in line with behavioral finance more generally the lesson is that we’re often not aware of our actual mental acuity. Old age may be a steady slow decline in decision-making, but there are plenty of short-term problems (everything from sickness to exhaustion to sheer panic in the face of a crashing stock price). There’s no reason to think that people are any more aware of their own diminished decision making abilities than a retiree, and a good investment process should take that into account.

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