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Board of Governors of the Federal Reserve System
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Insights into the Financial Experiences of Older Adults: A Forum Briefing Paper

Financial Decisionmaking of Older Adults

This section of the report discusses financial decisionmaking by older adults. It begins with a general overview of cognition and financial decisionmaking before reviewing findings from the Older Adult Survey on routine financial matters, such as money management and help with expenses. Next, it turns to major financial decisions concerning refinancing, investments, retirement, and planning for incapacity. The section concludes with a discussion of older adults' overall confidence in their own decisionmaking.

Aging, Cognition, and Decisionmaking

Poor decisionmaking can have real financial consequences. A notable study of financial decisionmaking by adults of all ages points out that many consumers make poor financial choices, but older adults are susceptible to such errors, often making mistakes because of declining cognitive ability.34 Younger consumers are vulnerable as well; however, their mistakes are more likely to be due to inexperience. The decline of many aspects of cognition, including the ability to quickly process information, recall information from long-term memory, and reason (also called "fluid intelligence") may begin as early as age 20 and, for some people, this decline can quickly accelerate after age 60. For older adults, however, accumulated knowledge and experience ("crystallized intelligence") may help compensate for some degree of cognitive decline. The study's authors describe financial decisionmaking as a U-shaped curve at the bottom of which the best financial decisions (least costly mistakes) are made at or about age 53.

While cognitive abilities vary by individual, several recent reports have cited declining cognition as a serious financial risk for older adults.35, 36 The American Psychological Association defines the core cognitive skills for managing finances by such indicators as the ability to identify coins, count money, conduct cash transactions, pay bills, and detect risk of fraudulent phone or mail solicitations for money.37 As an AARP study notes, the decline in financial capacity tends to occur early in the process of cognitive impairment. Impairment can appear subtle--older adults themselves and their families often are unaware of it--but once it starts it can progress quickly.38 One study has found that older couples often delay switching the member of the couple responsible for financial decisionmaking until that person reports his or her own difficulties managing money, which tends to occur well after cognition has declined.39 As noted in the introduction to this report, older adults participating in an online survey are likely to have higher levels of cognition than the older adult population at large.

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Help with Everyday Financial Matters

Almost one in five (18 percent) survey respondents say they needed help with everyday money management in the past year. For this survey, money management is defined as making deposits and transferring money, sending payments, writing checks, and balancing accounts. One-quarter (24 percent) of respondents in their 40s say they require assistance, compared to 12 percent of those age 70 and older. The finding that many older adults handle their own daily finances is generally consistent with other surveys. The Investor Protection Trust survey, for example, found that the majority (71 percent) of adult children with a parent age 65 or older say their parent handles their personal finances themselves; one-fourth reported that their parent relies on a family member to handle their finances, and only 3 percent reported their parent relies on a non-family member.40

Of those who say they received help with everyday money management, almost two-thirds (63 percent) relied on friends or family, only 7 percent used professionals, and one in 10 (11 percent) got help from other sources, such as government programs and nonprofit organizations. One in five (21 percent) of those respondents who reported needing help with everyday money management "couldn't find" such assistance.

When asked to compare the help with money management they receive today with the help they received three years prior, most respondents (85 percent) say that they did not receive help with money management then and do not receive help now. Overall, only 2 to 3 percent of respondents in any age cohort say they receive more help today than they did three years prior.

Figure 6. Middle-aged respondents are more likely than older groups to need help with money management and paying bills and expenses
Percent of survey respondents reporting that they needed help with money management and bills or expenses, by age

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Note: See Tables B.35 and B.39 in Appendix B; number of respondents was 1,818 and 1,819, respectively.

More than one-fifth (23 percent) of respondents say their household needed help covering the costs of bills and expenses in the past year. However, households in their 40s (32 percent) and 50s (28 percent) report needing help to a greater extent than those in their 60s (14 percent). Only about one in 10 (11 percent) of those age 70 and older said they needed such assistance.

More than two-thirds of those who needed monetary help (68 percent) say they relied on friends or family to give or loan their household money. Friends or family are the primary source of monetary assistance across all age groups. Of the one in 10 (10 percent) who said they received help from other sources, government and community programs were the most frequent write-in responses. One-fifth (23 percent) of respondents indicate that they do need help covering bills and expenses but "couldn't find it." A similar share of respondents reported needing help with money management and not finding it. Most respondents (82 percent) say, compared to three years ago, they did not need help meeting expenses then and do not need help now. This was indicated by an even higher proportion (92 percent) of those age 70 and older.

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Decisionmaking about Refinancing and Investments

Refinancing a mortgage can have long-term financial implications for homeowners. As noted earlier, one-third (32 percent) of respondents with mortgages say they had refinanced in the last three years. Almost one-half (47 percent) say they did not seek advice in deciding to refinance, but one in four (25 percent) asked friends or family members about the decision, while one-third (36 percent) consulted a professional such as a financial advisor, banker, or attorney.

Managing investments is another area where substantial numbers of respondents choose not to seek advice. Just over one-half (52 percent) of respondents reported they have investments.41 Of those that do, more than one-half (55 percent) say they manage their investments themselves, and 47 percent report using a professional. Only 6 percent rely on friends or family, while 4 percent seek advice from other sources. This is consistent with research from the Stanford Center on Longevity, which shows that more than one-half of pre-retirees never consult a financial professional for advice or guidance with financial planning.42

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Fraudulent Activity

In the investment arena, the perpetration of fraud against older adults has been the subject of a number of recent studies by U.S. Government Accountability Office (GAO), Federal Trade Commission, and Federal Bureau of Investigation, among others.43 About 7 percent of respondents in the Older Adult Survey said they believed that, in the last three years, they were asked to invest in a fraudulent activity; however, this figure may exclude those who may not be aware or willing to report that they were a victim and may include those who believed they were asked but actually were not. While perpetrators are typically friends or family members, a recent GAO report found a growing number of cases involving interstate and international marketing fraud against older adults.44 Researchers also estimated that the annual dollar amount loss by victims of elder financial abuse in 2010 was $2.9 billion, a 12 percent increase from 2008, and likely an underestimate due to the reluctance of victims to report fraud.45

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Expectations about Retirement

Planning for retirement is one of the more complex and consequential financial decisions for many people. Traditional defined benefit pension plans are no longer commonplace. Today, most workers and retirees are responsible for ensuring that their 401(k) balance and other savings are sufficient to fund their lifestyle in retirement, and for managing the drawdown of these funds carefully so as to minimize the risk of outliving their resources. Numerous studies have documented that many older adults still in their working years do not know how much they need to save, misjudge if and when they will retire or continue to work, and fail to seek or follow advice about preparing for retirement. The Older Adult Survey did not include questions on the details of retirement planning; rather, key findings from other research are summarized here and supplemented by some additional insights about the survey respondents from their participation in other RAND surveys.

Data from previous surveys in the RAND ALP for respondents in the Older Adult Survey indicate that one-third (34 percent) of working respondents in their 40s, one-fifth (20 percent) of those in their 50s, and 28 percent of those in their 60s think they "never" will stop working. Lower income respondents are more likely to say they will never retire. The average expected age of retirement among those who do expect to stop working is 68. Eight in ten (83 percent) respondents who strongly disagree or disagree with the statement "I really enjoy going to work" say they expect to retire. This dips to two-thirds (68 percent) of those who strongly agree or agree with the statement.

The RAND supplemental data in the survey further show that about one in five (21 percent) respondents who reported being retired also said that they presently are working for pay. This number includes about 41 percent of retired people under the age of 65 as well as 15 percent of retirees age 65 and older. The survey also indicated that about one in five (20 percent) retirees who do report working are self-employed. This compares to 13 percent of non-retirees who are self-employed.

Several studies have noted that workers who retired earlier than expected cite health issues and layoffs as typical reasons. Those who retired later than expected frequently cite needing a salary to pay for day-to-day expenses, making up for a shortfall in investments, retaining health insurance, and a desire to stay active as reasons they continue to work.46 The Employee Benefit Research Institute (EBRI) survey found that more than seven in 10 American workers think they will continue to work part- or full-time in retirement. In fact, only one in four retirees actually does continue to work in retirement.47 Research also shows there is considerable movement from part-time back to full-time, stopping entirely, and then returning to work for an employer or becoming self-employed.48

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Planning for Incapacity

As noted earlier, a person's ability to make appropriate financial decisions can rapidly decline after middle age. This suggests some urgency for making plans for possible incapacity, such as setting up powers of attorney, joint accounts, and trusts to handle critical financial decisions.

Figure 7. The vast majority of respondents lack a written power of attorney, including many in the oldest age group
Percent of survey respondents reporting their plans for financial decisionmaking in the future, by age

Accessible Version

Note: See Table B.56 in Appendix B; number of respondents was 1,811.

In the survey, 23 percent of respondents say they have a written power of attorney in place if they become unable to make financial decisions.49 One-half (50 percent) say "I have never planned" for someone else to make decisions for them, and another 12 percent say they have considered having a power of attorney assigned but "have not taken any steps to accomplish this." Another 14 percent say they have "informal plans," but no written power of attorney; less than 1 percent had a power of attorney but cancelled it.

The likelihood of having a power of attorney increases with age. About one in seven of those in their 40s and 50s (15 percent and 16 percent, respectively) have a power of attorney, increasing to more than one-quarter (28 percent) of those in their 60s and more than four in 10 (46 percent) of those age 70 and older. Of those with a power of attorney, the vast majority name a spouse (58 percent) or "another family member or friend" (37 percent).

Even older adults with a sense of their own mortality lack a power of attorney. Using supplemental RAND ALP data, it was possible to identify respondents who indicate they strongly agree with the statement "I have a sense that time is running out." Respondents in the survey who strongly agreed with this statement were no more likely than those who did not to have a power of attorney in place.

Figure 8. The likelihood of having a written power of attorney does not appear to be driven by respondents' perception that their "time is running out"
Percent of survey respondents who agree with the statement: "Time is running out" and reporting their plans for financial decisionmaking in the future

Accessible Version

Note: Totals in Figure 8 differ slightly from totals in Figure 7 because Figure 8 is for a subset of Older Adult Survey respondents who had previously answered the perception of time question in the RAND ALP. See Table B.58 in Appendix B; number of respondents was 1,463.

Older respondents are more likely than middle-aged respondents to have a will, but a substantial share across all the age groups do not. More than two-thirds (68 percent) of survey respondents in their 60s and three-quarters (78 percent) of those age 70 and older have a will, compared to less than one-half of those in their 40s (43 percent) and 50s (49 percent). Those who are single (divorced, separated, or never married) are much less likely (39 percent) to have a will than those who currently are widowed, married, or living with a partner (63 percent). Even among those who are widowed, married, or living with a partner, age differences persist. Only about one-half of such respondents in their 40s (45 percent) and 50s (53 percent) have a will, as compared to 73 percent of those in their 60s and 84 percent of those age 70 or older.

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Confidence in Decisionmaking Ability

According to previous studies, older adults generally are confident about their own decisionmaking. The 2012 FINRA financial capability study found, for example, that approximately three-quarters of consumers of all ages rated themselves highly on their own financial knowledge (73 percent) and on their ability to make good day-to-day financial decisions (76 percent). Yet, when taking a financial literacy quiz consisting of five questions testing knowledge of financial concepts, the average score was 2.9 correct out of 5. Adults age 55 and older scored only slightly better, with an average score of 3.3 correct.50

In the Older Adult Survey, respondents are asked to compare their confidence in making financial decisions today to five years ago. One-third (34 percent) are more confident compared to five years ago; about six in 10 (61 percent) have the same level of confidence; and relatively few (5 percent) are less confident. Middle-aged respondents were more likely to say they are "more confident" in their decisionmaking, while the oldest respondents were more likely to say their confidence level is "the same."

As mentioned in the introduction to this section of the report, individuals' financial decisionmaking abilities and perceptions of those abilities may not correspond. Cognition scores were obtained for 1,690 of the 1,821 Older Adult Survey respondents from previous surveys using the RAND ALP.51 As just noted, very few respondents of all ages said they are "less confident" in making financial decisions compared to five years ago, although those who did generally had statistically significant lower cognition scores than other respondents. Interestingly, the cognition scores of respondents who said they were "more confident" than five years ago were slightly, but statistically significantly, lower than the scores of those who now have "the same" level of confidence.

Figure 9. Very few respondents say they are "less" confident making financial decisions compared to 5 years ago; respondents in their 60s and 70s and older are more likely to say their level of confidence is "the same"
Percent of survey respondents feeling more, less, or the same level of confidence making financial decisions compared to five years ago, by age

Accessible Version

Note: See Table B.64 in Appendix B; number of respondents was 1,819.

Likewise, the Investor Protection Trust survey found high levels of confidence among adult children and their parents. Nine in 10 (89 percent) adult children are "very confident" or "somewhat confident" in their over 65-year-old parent's ability to handle personal finances. The parents themselves were even more confident: 97 percent say they are "very" or "somewhat" confident of their own abilities.52

Supplemental RAND ALP data for Older Adult Survey respondents also included information on survey respondents' perceptions of changes in their decisionmaking ability. Middle-aged adults are more likely than the oldest adults to note improvement in their decisionmaking ability. More than one-half (54 percent) of respondents believe that their ability to make decisions has "improved as they have aged." Middle-aged adults were more likely to note improvement. More than two-thirds (69 percent) of those in their 40s say they have gotten better, compared to six in 10 (60 percent) of those in their 50s, barely one-half (51 percent) of those in their 60s, and roughly one-quarter (28 percent) of those age 70 and older.

Only a small number (4 percent) of respondents say they entered into a major ($1,000 or greater) financial transaction in the last three years that they "did not completely understand." Cost and fees were cited as main features of the transaction they said they did not completely understand.

Also, only 10 percent of respondents expressed regret over a major financial transaction. Most commonly cited reasons why respondents expressed regret were that they paid more than they should have (36 percent) or bought something they did not need (14 percent). In responses to an open-ended question, respondents most frequently said vehicle purchases and investment decisions generally were sources of regret.

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34. Agarwal, Driscoll, Gabaix, and Laibson (2009).   Return to text

35. MetLife Mature Market Institute (June 2011).  Return to text

36. Investor Protection Trust (2012).   Return to text

37. American Bar Association (2008), p. 74.  Return to text

38. Karp and Wilson (2011), p. 1.   Return to text

39. Hsu and Willis (2011), p. 71.  Return to text

40. Investor Protection Trust (2010), pp. 17-18.  Return to text

41. Respondents were not provided with a definition of investments as part of the survey. However, investments are commonly understood to include stocks, bonds, certificates of deposit, mutual funds, and similar financial products.   Return to text

42. Stanford Center on Longevity (2012), p. 27.  Return to text

43. Various testimonies (2013), Fraud on the Elderly: A Growing Concern for a Growing Population, hearing before the Subcommittee on Commerce, Manufacturing, and Trade of the House Committee on Energy and Commerce, U.S. House of Representatives, May 16, 2013. Available online at to text

44. Brown (2013).  Return to text

45. MetLife Mature Market Institute (June 2011), p. 7.  Return to text

46. MetLife Mature Market Institute (April 2012), p. 8.  Return to text

47. Helman, Adams, Copeland, and VanDerhei (2013), p. 30.  Return to text

48. Maestas and Zissimopoulos (2009), pp. 20-22.  Return to text

49. Respondents were provided with a definition of power of attorney as a legal document that names someone who will make [financial] decisions for them now or at some time in the future.   Return to text

50. FINRA Investor Education Foundation (2013), pp. 27-30. Respondents rated themselves 5 to 7 on a 7-point scale. The five questions covered interest rates, inflation, bond prices, mortgages, and risk.  Return to text

51. This report uses fluid and crystallized cognitive ability measures from the RAND ALP based on the Woodcock-Johnson III (WJ-III) test, which is part of a cognitive battery to attain person ability compared to a nationally normed sample. For more on the W Score and references, see Appendix A: Older Adult Survey Methodology.  Return to text

52. Investor Protection Trust (2010), p. 6.  Return to text

Last update: July 30, 2013

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