It’s well-understood that as we age, we experience a general decline in our physical health. And there is increasing evidence that cognitive decline in old age is also natural and inevitable, and cannot be slowed by education or intelligence, nor by so-called brain exercises such as solving crossword puzzles.  Our brain, like the rest of our body, loses its ability to respond quickly and precisely over time.  Michael Finke and Sandra Huston of Texas Tech University and John Howe of the University of Missouri recently updated a study entitled “Old Age and the Decline in Financial Literacy.”  They found that average financial literacy scores fell by half between the ages of 65 and 85, and the rate of decline was consistent across characteristics like education, gender and wealth.  What’s worse, they also discovered that despite the declining cognitive capabilities, confidence in financial decision-making abilities remained high.  In other words, after age 60 you will begin to lose your ability to make good financial decisions and won’t notice it is happening.

Does financial literacy really matter? Yes, according to numerous research papers.  One by Maarten van Rooij (Dutch Central Bank), Annamaria Lusardi (Dartmouth College), and Rob Alessie (University of Groningen) found that individuals with a higher degree of financial literacy are more likely to invest in the stock market (a necessary component of wealth accumulation in retirement).  Other research has shown that higher levels of financial literacy correlate with better mutual fund selection (i.e. more sensitivity to cost).  The relationship also applies to liabilities.  Those with low literacy tend to incur higher fees for borrowing and are more likely to maintain excessive debt loads.

This should be very concerning to individuals and families. With the virtual disappearance of pensions, not to mention longer retirement lifetimes thanks to improved healthcare, more retirees than ever are dependent on making their own good investment, tax, risk management, and other financial choices to ensure their savings last.  In addition, financial mistakes can have a more dire impact the older you get since the time available to recover from them becomes shorter.  And with seniors age 60 and older holding more than half of all the financial wealth in the U.S., they’ve become the primary targets of financial scams.  Declining financial skills coupled with misplaced confidence makes older consumers especially vulnerable to complex, unsuitable, and even fraudulent investments.

The study’s implication is that at some point in our lives every one of us will need to get help with our financial decision-making. Howe recommends finding a financial advisor who has a good reputation and helps make every financial decision clear to you.  “It is important to find an advisor who has your best interests at heart,” he said. “Investors should expect to pay for good financial advice; it will save them thousands of dollars in the long run.”  I recommend starting your search at the Certified Financial Planning (CFP) Board’s website (www.letsmakeaplan.org). CFPs go through rigorous training, agree to follow a strict ethical standard, and demonstrate competence through stringent testing and years of experience.  The site has a link enabling you to find a CFP in your area.  A good CFP should be able to help you make investment choices that will maximize the likelihood of achieving everything you want for the remainder of your life.

There are studies that have found that people with naturally higher cognitive abilities (and in particular mathematical skills) may be able to continue to make good financial decisions longer than others. But at some point we will all need help.  And since we don’t know when our cognitive abilities will begin to decline (and according to the study won’t recognize it even after it starts happening), it’s a good idea to begin working with a CFP long before we reach an age where our financial literacy becomes suspect.

If you’re interested in testing your own current level of financial literacy, here’s a link to a subset of the questions asked in the study: https://missouri.qualtrics.com/SE/?SID=SV_efmvyNNlANLTSVT .