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Cognitive decline poses a dangerous trap for retirees. The ability to make financial decisions is impaired, while self-confidence remains unchanged, leaving people vulnerable to mistakes and scams without realizing anything is wrong.
Certified financial planning professional Kevin Lum recently tackled this challenge Youtube video Economist Lewis Mandel’s book “What Do I Do When I Get Stupid?” Based on research.
The title came from a 70-year-old retired pediatrician who asked Mandel what he should do with his money when he started losing his mind. Research shows that financial decision-making ability peaks at age 53.
“After that, mistakes start to pile up and become more costly over time,” Lum said in the video. A major study by Michael Finke found that financial literacy declines by about 2% per year after age 60.
The dangerous thing is that confidence in one’s ability to make financial decisions does not diminish.
“You’re becoming worse at making financial decisions and you have no idea it’s happening,” Lum said. One researcher called it a “toxic combination.”
FBI’s Internet Crime Complaint Center Americans over 60 were reported to have lost $4.9 billion to scams in 2024, and that figure only includes reported losses.
Lum outlined seven strategies for protecting retirement money before cognitive decline occurs.
create an income floor
Essential expenses, including housing, food, utilities, insurance and health care, should be covered by guaranteed income with no judgment required. “For most people, Social Security is going to be the foundation,” Lum said.
Delaying Social Security increases benefits until age 70 and creates a higher inflation-adjusted income level for life. Lum also mentions annuities as an option, although she has “serious problems with building your entire retirement plan around some type of annuity.”
His firm creates retirement pay checks for clients using software that calculates safe withdrawal rates.
“All the customer knows is that they have a pay check coming into their account every month,” he said.
Simplify your financial life
Consolidate old 401(k)s, IRAs across different firms and scattered brokerage accounts.
“Fewer accounts means less details. It means fewer passwords. It means fewer decisions and less opportunity for mistakes,” Lum said.
The principle is to reduce the number of decisions future versions of you have to make.
automate everything
Every bill that can go on autopay should be on autopay.
“Direct deposit your Social Security. Automate your pension payments. Set up automatic RMDs at your custodian, if possible,” Lum said.
He and his wife automate house payments, utilities, credit card payments, cell phone bills, insurance and Internet. The challenge is to automate account fraud tracking, but the benefits of simplification far outweigh the burden of monitoring.
establish legal protection
Get a Durable Financial Power of Attorney today, not later.
“Once cognitive decline occurs, you no longer have the legal capacity to sign,” Lum said.
Name a trusted contact at each brokerage firm. This allows patrons to contact someone if they suspect abuse or cognitive decline. Federal rules allow a temporary hold on questionable disbursements during an investigation.
Consider a revocable living trust for the smooth transfer of assets out of retirement accounts. Without a plan, families may have to petition the courts for guardianship, which is slow and expensive.
Create “When I Find a Stupid File”
Lum attributed the idea to Mandel’s book. A binder or secure digital vault should contain every account, income source, recurring bills, insurance policies, legal documents and contact information for advisors. Update the file annually to keep it current.
Know the warning signs
Research from the National Institute on Aging shows that financial red flags may appear five to seven years before a dementia diagnosis. Signs include unpaid bills, confusion about balances, and duplicate purchases.
Tell the family what to look for and allow them to speak up when something seems wrong.
“Keep an eye out for unusual withdrawals or new friends, especially if money is involved,” Lum said.
Make a plan with your financial advisor
Ask the advisors about their protocols if they notice something is wrong. Lum said her company works to ensure clients have trusted contacts, updated beneficiaries, powers of attorney and revocable trusts on file.
One advisor provides monitoring and the other set of eyes keeps an eye on the accounts. “They’re able to help slow it down, have a conversation with you, reach out to your trusted contact to help provide a layer of protection,” Lum said.
The basic message is simple: Act now. The smartest retirement plan is one that works even when you can’t think straight.
“Your confidence won’t let you down. You won’t feel yourself falling,” Lum said.