The Hidden Retirement Risk: What Happens When You Can’t Manage Your Money?
You’ve planned for retirement – saved diligently, mapped out your Social Security strategy and thought through market risks. But what happens if one day, you simply can’t manage your money anymore?
Nearly 30% of adults over 65 experience some level of diminished cognitive capacity, from mild impairment to dementia. And here’s the part that should get your attention: Managing money is often one of the very first skills to decline.
The irony? Many of us never plan for that possibility.
On a recent episode of the HerMoney Podcast, sponsored by LIMRA, we explored why health risks – especially cognitive decline – may be one of the biggest blind spots in retirement planning, and what you can do now to protect your finances, your family and your future self.
WHY HEALTH RISKS MIGHT MATTER MORE THAN THE MARKETS
In a new research paper, Chris Heye, Ph.D., a LIMRA Retirement Income Institute Fellow and the CEO and Founder of Wealthcare Planning and Wealthcare Solutions,
shifts the focus of retirement risk. Typically, we fixate on the markets, inflation and taxes. But health-related risks are becoming just as important – largely because we’re living longer.
“In many ways, the same advances that are keeping us alive longer are also increasing the financial burden and the risk,” says Heye. “Many of us today may be spending 20 or 30 years in retirement while managing rising healthcare costs, long-term care needs, and a much more complex financial system.”
A key factor is the growing gap between lifespan (how long we live) and health span (how long we stay healthy). “We can keep people alive longer, but we probably have a little way to go keeping them both alive and really healthy,” adds Heye.
COGNITIVE DECLINE: THE FINANCIAL BLIND SPOT
Among the many health risks we face as we age, cognitive decline stands out. In past generations, it posed less of a financial threat, simply because fewer people lived long enough to experience it. That’s no longer the case.
One of the key factors in poor financial decision-making as we age is a decline in what psychiatrists and neurologists call “executive function.” “Executive function is the type of thing that helps you plan, stay organized, connect the dots,” says Heye. “That really describes financial decision making – especially retirement decision making – and the ability to plan, as well as to connect the dots. Unfortunately, as many of us get older, our executive function starts to decline.”
In other words, the very skills you rely on to manage your money are often the first to fade.
PROTECTING YOURSELF – AND YOUR MONEY
Planning for cognitive decline isn’t easy – but starting early can make all the difference. As Erin Gilmore Smith, Head of Estate Planning for Edelman Financial Engines, explains, you don’t have to do everything at once. You can tackle it in phases.
A simple first step? Name a trusted contact on your financial accounts – someone your institution can reach out to if something seems off. From there, focus on these essentials:
Durable power of attorney: This allows someone to manage your finances if you can’t – they can write checks, trade in your brokerage account and essentially, make sure all things financial are handled. “Bring that person in before all of a sudden they have to have a crash course because something’s happened to you,” advises Gilmore Smith.
Health care power of attorney: This designates someone to make medical decisions on your behalf. Ideally, it’s an individual who is accessible, organized and ready to advocate for you.
HIPAA authorization: “A lot of folks don’t realize that just because the state where you live says that you can sign a health care power of attorney, if you’re naming someone to make health care decisions for you, federal law says that that person is not entitled to your health care information,” explains Gilmore Smith. Don’t let that be a stumbling block.
Last will and testament: For many younger or simpler households, a will may be enough. But, for more complicated situations (for example, if you have significant assets, real estate in multiple states, or a complex family makeup), a revocable trust (also called a living trust) may also make sense. It doesn’t replace a will, but rather rides alongside it. “With a revocable trust, we do a little bit more work on the front end to re-title assets out of your individual name, into the name of a trustee or your trust, so that those assets, when you pass away, or lose the ability to manage your own financial matters, are already titled in the trust,” explains Melinda Merk, a Principal and estates and trusts/tax attorney with the law firm McCandlish Lillard. “Then, whoever you name in your trust document has the legal authority to step in. The revocable trust is a stronger document.”
Make sure your family knows your team: Whether it’s your estate planning attorney or financial professional, Gilmore Smith suggests laying the groundwork early. “Build that foundation because that first meeting your kids have with your advisor, you don’t want it to be because something really bad happened.”
WHERE TO FIND THE HELP
If you’re not sure where to start with putting the above together, ask your financial advisor for referrals, or turn to family and friends for recommendations.
Merk also recommends looking for attorneys affiliated with the American College of Trust and Estate Counsel (ACTEC). “You can be assured that any attorney who is a member of ACTEC is going to be very experienced and a good advocate,” she says.
WHY THIS HITS WOMEN EVEN HARDER
For women, planning for the unknown is a bit more complex. Why? For starters, we make up a disproportionate share of those impacted by dementia and its financial fallout. In part, that’s a result of the additional six years on average that women live beyond men. Due to this added longevity, we also tend to outlive our spouses, which can create issues for women who haven’t taken an active role in the family’s finances.
“There is this additional burden a lot of women face and it’s something that we really need to put more attention on – as both financial professionals and educators – helping women and understanding that millions of women are gonna be going through this process in the next few years,” explains Heye. To help prepare, Gilmore Smith emphasizes the importance of women building both knowledge and community. “You’ve got to plan a little bit more,” she says, encouraging women to actively participate in financial conversations and “build your community well in advance of when you need them.”
Longevity adds another wrinkle, too. If you live into your 90s, your children – who may be in their 60s or 70s – could face their own cognitive challenges. At that point, you need to consider whether they are still suited to handle your finances and other matters. As Gilmore Smith notes, that’s why backup plans matter when you’re naming people to step in and make decisions regarding your finances and your health. “Some people will name their child, and then, behind their child, they’re going to name a grandchild,” she explains. “Sometimes that works really well and the child can say, ‘I’m feeling a little overwhelmed…can you step in and take over?’”
A SIMPLE WAY TO REDUCE RISK: PROTECTED INCOME
One additional strategy? Simplify. Heye points to protected income – like annuities – as a way to reduce financial complexity later in life. “One nice thing about having protected income is it reduces the number of decisions you have to make and it can put certain things on autopilot,” he explains. “That’s always a suggestion I make to older adults and their families – put as many things on a safe autopilot as possible.”
He calls it a form of “cognitive insurance.” “It helps protect you from making bad decisions in the sense that you have fewer to make and you have fewer opportunities to go in and start messing around with things that you shouldn’t be messing around with,” Heye adds.
THE BOTTOM LINE
If you haven’t planned for a time when managing your money becomes too difficult for you to handle yourself, start small. “From an estate planning perspective, you need the basics,” says Gilmore Smith. “You need to have a durable power of attorney, you need to have a healthcare power of attorney with HIPAA authorization, and go ahead and get yourself a last will and testament. Once you have those basics in place, you can build from there.”
You also want to start assembling your support system early. “I like to call it your financial wellness team,” Heye says. “This can be professionals, family members, trusted friends…It’s almost never too early to start that process.”
And last but not least, don’t wait. “We’re all busy…we lead busy lives, but don’t put it off,” stresses Merk. “If you don’t have basic documents in place, you’re not only leaving yourself exposed to crisis, you’re also putting a huge burden on your family members and loved ones.” Cognitive decline isn’t inevitable, but planning for it is essential. The best defense is putting systems, safeguards and the right people in play while you’re still fully in charge.
Protected income can help create greater stability in retirement, especially in the face of potential cognitive decline. If you’re curious and want to dig deeper, this resource from LIMRA can help: