Kevin explains research showing financial decision-making peaks around age 53, financial literacy declines about 2% per year after 60, and confidence often doesn’t decline—creating risk in retirement as financial complexity increases and scams become more sophisticated.
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Hey, welcome to another episode of Retirement Made Simple.
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I'm your host, Kevin Lum. I'm a certified financial
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planner based in Los Angeles, and this podcast is dedicated to
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helping a million people retire without worry.
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As a quick reminder, every episode here comes straight from
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our YouTube channel. So this is just the audio so you
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can listen while you're walking, driving, or living your life.
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What should I do with my money? I'm afraid I'm getting stupid.
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This was a question that a 70 year old retired pediatrician
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asked a few years ago, and it was a great question.
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He was essentially asking what happens when my mind begins to
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fail me. So today I'm going to walk you
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through what the research actually says about when this
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happens, why it's so dangerous specifically in retirement, and
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most importantly, I'm going to give you a practical playbook. 7
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things you can do to protect yourself and your money.
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Now let me start with the research because I think this is
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going to surprise some of you. Now I've talked about this in a
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previous video and I made a few people upset at me just talking
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about the research. But there was an economist named
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Louis Mendel and he wrote a book called What do I do when I Get
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stupid? And the title came from the
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conversation I mentioned in the opening.
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A7 year old retired pediatrician came to Louis and he said what
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should I do with my money? I'm afraid I'm getting stupid.
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And Mendel realized that this was actually one of the most
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important questions in retirement planning that almost
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no one was asking or talking about.
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So here's what the research shows.
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A Brookings paper on economic activity that was also published
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to the National Bureau of Economic Research.
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It looked at financial mistakes across 10 different credit
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markets and they found that the age where you make the fewest
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financial mistakes, the peak of your financial decision making
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ability is age 53. So I am still on my way up the
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mountain, right? That's it.
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Age 53 is the peak. And after that mistakes start
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increasing and they get more costly over time.
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Now there's not this massive increase when you turn age 53 or
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age 54 and you're making massive mistakes, but 53 is kind of the
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peak. That's the best year.
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Now, there was a major research study done by Michael Finke and
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his colleagues looking at thousands of older Americans.
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They found that financial literacy, right, your ability to
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understand and make good decisions about money decline by
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about 2% per year after the age of 60.
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I talked about this in a prior video and there were a lot of
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unhappy people in the comments, right?
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Just because you turn age 60 doesn't mean you are now unable
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to make financial decisions, right?
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We just have to look at Warren Buffett as a case of you can
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continue to be quite smart and make great financial decisions
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for a long time. But in this research study by
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Michael Finke, he found that there was a slow, consistent
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decline, and the rate of the decline line was similar
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regardless of gender or education level.
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But here's the part that really catured my attention, and I
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talked about this in a previous video as well.
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Your confidence in your ability to make financial decisions.
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It doesn't decline. One of the researchers called
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this a toxic combination. You're getting worse at making
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financial decisions and you have absolutely no idea it's
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happening. You feel fine.
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And in fact, it appears that your confidence in your decision
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making ability around money increases.
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You feel like you have it handled.
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In fact, you feel like you are better than you've ever been.
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And that can be the trap. And the research helps us
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understand a bit about what's happening under the hood.
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There are two types of intelligence at play here.
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The first is fluid intelligence. That's your ability to think
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abstractly, to process new information, to solve problems
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that you've never seen before. And then there's crystallize
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intelligence, right? That's your accumulated
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knowledge, your vocabulary, your experience.
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And most people assume that crystallize intelligence holds
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up forever. And it does hold up longer, but
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it doesn't hold up indefinitely. Research shows that declines in
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memory and language related skills account for a substantial
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share of the drop and financial literacy scores later in life.
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And here's the thing, when your brain starts slowing down, it
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compensates, right? It it starts relying more
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heavily on shortcuts and rules of thumb.
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Sometimes that's completely fine, but in a high stakes
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situation like healthcare decisions, or when you should
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claim Medicare, or when you should claim Social Security and
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financial decisions, those shortcuts can lead to mistakes.
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You start satisfying. Try to say that word three times
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fast. You start satisfying, which is a
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fancy word for picking the first option that seems good enough.
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Instead of analyzing all of your options right, you look at less
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information before making decisions.
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You don't even realize you're doing it because again, your
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confidence hasn't changed and in fact, your confidence might have
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increased now before your retirement or during your
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accumulation years rate. You have margin for error.
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You have a paycheck coming in and even if you really mess up
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things financially, more money is going to come in.
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You have time to recover from your mistakes.
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And for many people, right, your employers are helping you handle
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a lot of your financial decisions, right?
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Healthcare is often taken care of.
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Your investments are just you have your 4-O1K gives 10 or 20
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options, and you choose a target date fund and you're done.
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But once you retire, you have to take on a lot more of the mental
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load. You have to decide, you know,
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what to do about your investment options and what to do about
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Social Security and Medicare and do I do a supplemental planning?
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All the myriad of options that you need to process in
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retirement. And now there's no paycheck to
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bail you out, right? You're drawing down your assets,
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not building them up, and the decisions actually get harder
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and more complex. Social Security timing and RMD's
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and Roth conversions of withdrawal rates and tax
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planning and health care costs. And I could keep going on.
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If you've been watching my YouTube video or other YouTube
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videos, you understand that the complexity of your financial
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life is going up at the exact same moment that your ability to
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handle that complexity is going down.
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Now, I want to be a little careful in talking about this
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because I know some of you, right?
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Some of you are my client and, and many of you I've talked to
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either in the comments or in person or in via Zoom.
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And I know that you are brilliant analytical people.
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And, and so this is not that you all are just unable to make
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financial decisions, but there is this reality that as we age,
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our ability to make these decisions begins to decline at
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the same time that complexity increases.
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And then on top of all that, this makes us more vulnerable to
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fraud and scams. I mean, the number of people
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I've talked to who are very smart, very sophisticated, who
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have fallen victim to scams is increasing on a daily basis.
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Partially this is because AI is making the scams so much more
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believable. It's not because you're
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careless. It's because the same brain
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changes that are reducing your financial literacy are also
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reducing our ability to tech deception as the technology and
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the ability to carry out these crimes is getting better and
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better. The FBI's Internet Crime
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Complaint Center reported that Americans over the age of 60
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lost $4.9 billion to scams in 2024.
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And that is just the losses that were reported.
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The Federal Trade Commission estimates that the real number,
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because so much fraud actually goes unreported, but the real
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number could be dramatically higher.
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So we have a couple things going on.
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One, we have complexity increasing as our ability to
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make these decisions begins to decline.
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And at the same time, we have an increase in the ability of these
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financial scams to be incredibly sophisticated.
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And so that just means more and more people are being taken
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advantage of. So you've got these two
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problems. So what do we do about all this?
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Because some of you have been watching this and like, I
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understand the problem. Tell me what to do.
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So Mendel's core argument is simple.
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Make your finances stupid proof before you get stupid.
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Don't plan for the smart version of yourself, plan for the
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version of yourself that can't do math anymore.
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So let me walk you through what this looks like in practice, and
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I've got 7 things for you to look at.
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First, build an income floor that you can't screw up but your
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essential expenses. Housing, food, utilities,
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insurance, healthcare should be covered as much as possible by
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guaranteed income or highly predictable income that does not
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require a decision from you. For most people, Social Security
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is going to be the base. This gets back to the whole
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question of do I delay Social Security, right?
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If we're trying to increase that base income, that guaranteed
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income, Social Security, delaying Social Security
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increases the benefit all the way up till the age of 70 and
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creates a higher income floor. And that benefit is inflation
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adjusted for life. But on top of that, Bendel
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recommends purchasing an annuity, right?
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You hand over a lump sum to an insurance company and in return,
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they send you a check every month for life.
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It's easy. That check just shows up.
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I understand why he recommends that I have some serious issues
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with building your entire retirement plan around some sort
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of annuity. But I do understand the
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importance of having fixed guaranteed income coming in
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right? Because if you're essential
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expenses are covered by Social Security and predictable
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lifetime income, bad investment decisions like say you decide to
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put all your money into Bitcoin, you know, six months ago right
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before it tanked and now you're down by 50%, right?
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Bad investment decisions have less of an ability to make you
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homeless. Now, I think there are other
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ways to create predictable income.
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This is one of the reasons that our firm creates a retirement
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paycheck for our clients. We have some software called
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income Laboratory, which helps us understand a safe withdrawal
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rate. And then literally we just
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create a paycheck, a dependable, consistent paycheck for our
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clients each month. We're figuring out what to sell
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and you know which account we're pulling from an asset location
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and all the things that you need to think about.
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But for the client, all they know is, is that a paycheck
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shows up in their account each month.
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And the same way that an annuity check or Social Security would
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show up each month. The reality is that some people
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don't want to hire a financial advisor and they don't want to
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purchase annuity. And so they have this gap of how
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do I go about creating consistent retirement income
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from My Portfolio as I age? That leads into Step 2.
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Simplify your financial life. If you've got old four O 1 KS
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from multiple jobs and Iras at different firms and brokerage
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accounts scattered around, consolidate your accounts as
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much as possible. Fewer accounts means fewer
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statements. It means fewer passwords, It
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means fewer decisions and fewer opportunities for mistakes.
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Consolidation can also simplify things like R&D management once
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that becomes a problem. But the principle is simple.
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Reduce the number of decisions your future self has to make,
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which leads into tip 3. Automate everything.
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Every bill that can go on auto pay should be on auto pay,
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right? Direct deposit, your Social
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Security, automate your pension payments, set up automatic RM DS
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at your custodian if that's possible, or make sure your
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financial advisor was taking care of that for you.
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Automate your paychecks, right, your Social Security or whatever
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coming into your bank account, but also automate made as many
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of your payments as possible. I mean, my wife and I, we
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automate everything you can possibly imagine.
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We automate our house payment, we automate our utility
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payments, our credit card payments are we automate our,
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our, our cell phone payments and insurance or insurance, but also
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Internet, all the different things.
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If we can automate it, we do. Now, I have to be honest, there
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is a challenge to automating things, right?
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When you automate your credit card payment, you make sure you
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pay it every month. You pay the statement balance
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off. But if you're not paying
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attention to what's going on that credit card, you might miss
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fraud that's hitting your card. So you can't completely take
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your mind off watching over these things.
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But just as much as you can automate, as much as you can
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simplify, as much as you can consolidate and reduce the
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amount of things your brain has to process, the better off
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you're going to be #4 put legal protections in place now.
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Get a durable financial power of attorney.
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Not later today, because once cognitive decline sets in, you
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may no longer have the legal capacity to sign one.
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Name a trusted contact at every brokerage firm.
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This allows the the custodian, the firm to contact someone you
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trust if they expect exploitation or you know, some
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sort of cognitive decline. And under federal rules they can
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place a temporary hold on a suspicious disbursement while
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they investigate. So for example, if you called
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your financial advisor and say you want to cash out every bit
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of money in your IRA and put it all into some sketchy sounding
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crypto website, your financial advisor can call the trusted
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contact, but only if you've set one up.
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They can call the trusted contact and say, hey, I just
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talked to so and so and they've asked to sell all their IRA and
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move all the money to this very sketchy website.
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Are they OK? Right.
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And they can contact you and make sure you're OK.
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If you don't set a trusted contact up and you call and say,
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hey, I want to sell everything and move it all to the sketchy
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site, there's really nothing they can do.
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So go ahead and set that trusted contact up up sooner rather than
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later. Also consider a revocable living
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trust for a smooth transition of assets outside of your
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retirement account. Right.
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Assets inside of your retirement account are going to pass via
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beneficiary, but assets outside of your retirement account can
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be trickier. Think your brokerage account,
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houses, property, etcetera. And without planning, your
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family may have to petition the court for conservatorship.
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That's slow, expensive, and avoidable.
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So get the legal documents in place sooner rather than later
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#5 create a when I get stupid file.
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This was not my idea, this was the author's idea.
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But one binder or one secure digital vault where every
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account, every income source, every reoccurring bill, every
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insurance policy, every legal document, you know the the
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contact for your financial advisor or your CPA, your state
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attorney, all those things reside in that one.
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If I get stupid, document so someone can step in and
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understand your financial life in a weekend.
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And then don't just create that binder once, but make sure you
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take time once a year to update it so that it is updated as long
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as possible. Number six, know the warning
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signs. Research summarized with the
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National Institute on Aging shows that financial red flags
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can appear 567 years before a dementia diagnosis, right Things
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like unpaid bills or confusion about balances or duplicate
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purchases. For example if you go to your
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parents house and they have 7 different bottles of peanut
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butter all unopened, either They found a really great deal at
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Walmart that week which I have some relatives.
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That could be the the case or maybe something is wrong right?
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Watch for unusual withdrawals or new friends, particularly if it
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new romantic partners. But it seems to revolve or
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involve money. Tell your family what to watch
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for and then give them permission when you are still
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lucid to speak up and say I think something is off.
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The problem is if you don't set up, particularly the legal
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protections early, once things begin to set in and people begin
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to realize something is off, sometimes it's too late.
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But if you train people, whoever it might be, friends or family
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like, these are things you should kind of be aware of.
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I start doing some out of the ordinary things.
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I need you to step in or speak up.
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It can be very helpful to have those conversations sooner
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rather than later #7 have a plan with your financial advisor.
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You can have an explicit conversation about cognitive
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decline, right? Ask them what's your protocol,
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If you notice something is off right, have the conversation
00:17:23
with them. You know, it's honestly, it's
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one of the things we're working out as a firm.
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We're trying to make sure that we have Trusted Contacts for our
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clients. We're trying to make sure the
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beneficiaries are up to date. We're trying to make sure people
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have power of attorneys and those are up to date and revoke
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will trust. Part of our planning process is
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we want to review those documents if possible.
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And then we also want them in our files so that we can review
00:17:44
them on an ongoing basis and make sure they're staying up to
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date. And honestly, and this is going
00:17:51
to sound like a sales pitch, maybe it is a sales pitch, but
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if you don't have a financial advisor and you've been thinking
00:17:58
about it, this is one of the strongest arguments for having
00:18:02
one, right? Not for stock picking, but for
00:18:05
oversight. Another set of eyes who's
00:18:08
watching your account, who's watching the different areas,
00:18:10
who knows you well enough, who understands you well enough, and
00:18:13
who can help spot some of these signs of cognitive decline and
00:18:18
be a layer of protection. Right?
00:18:19
When you get pulled in by some crazy scam and you call them,
00:18:23
they're able to help slow it down.
00:18:25
Have a conversation with you, contact your trusted contact to
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help provide a layer of protection.
00:18:31
And then the other reason you might want to have a financial
00:18:34
advisor, again, this might sound like a sales pitch, Maybe it is
00:18:37
a sales pitch because I would love to work with you.
00:18:39
But if you have one spouse who knows all about the finances and
00:18:43
who has it all dialed in, right? There's a, there's a possibility
00:18:46
that something could happen to that spouse or that they begin
00:18:49
to have decline and the other spouse has no idea what to do,
00:18:54
right. And so again, a financial
00:18:55
advisor can be very helpful in figuring out, you know, how we
00:18:58
going to invest these assets, which accounts are we going to
00:19:00
pull cash from? I think creating a retirement
00:19:03
paycheck and owning that process is one of the more important
00:19:08
things a great financial advisor does.
00:19:10
Yes, a great financial advisor should invest your money well
00:19:13
and they should do great tax strategy, but also managing that
00:19:16
income strategy for you is one of the more important things a
00:19:19
great financial advisor does, right?
00:19:21
They create that guaranteed consistent income from your
00:19:25
different accounts. And they're watching your
00:19:27
accounts, you know, using software like Income Lab, making
00:19:30
sure that you're not spending more than you safely can, if
00:19:33
there's a market down return, if you need to make adjustments in
00:19:36
your spending and so forth. OK.
00:19:38
And that's telling you and why you need a financial advisor,
00:19:40
even though I really do believe it can be one of the best
00:19:43
investments you make as you age because it's helpful to have
00:19:47
another set of eyes that knows you well and that you're working
00:19:50
with on an ongoing basis. OK.
00:19:53
But I will end that there. In closing, here is why this is
00:19:56
such an important topic. Your confidence is not going to
00:20:01
warn you. You will not feel yourself
00:20:04
declining. This is why you have to take
00:20:07
action now. This is why you have to begin
00:20:09
setting things up now, right? The smartest retirement plan
00:20:13
isn't the one that maximizes returns or maximizes tax savings
00:20:17
or optimizes, you know, whatever it is, it's the one that still
00:20:21
works when you can't think straight, right?
00:20:25
So begin thinking, how am I going to build that income
00:20:27
floor? How am I going to simplify?
00:20:30
How am I going to automate my finances?
00:20:32
How can I provide protection to my finances and to my family?
00:20:35
What is my plan? And you need to figure that out.
00:20:38
And you need to take action sooner rather than later.
00:20:41
Hey, thanks for listening. If you enjoyed this content, if
00:20:43
you do me a favor and just leave a review on whatever podcast app
00:20:47
you're using. Apple or Google?
00:20:48
Or Spotify and also you can find us on YouTube.
00:20:51
Just search Foundry Financial or Retirement made.
00:20:54
You should be able to find us by searching both and then you can
00:20:56
find ourwebsite@foundryfinancial.org.
00:20:59
Thanks for listening.