How undiagnosed cognitive decline eats into seniors’ retirement savings

Since current retirees are living longer than previous generations, they are more likely to suffer memory loss, according to the economics professors who were co-authors of the study. What’s more, current retirees are making more decisions about their finances since relatively few have guaranteed income from pensions or annuities, the researchers said.

As a result, says Franco Peracchi of Tor Vergata University of Rome, today’s seniors face an elevated risk of financial losses that can erode their standard of living, especially if they are active in the stock market and are unaware of their cognitive decline.

“The current literature has been emphasizing the need to educate younger generations about financial literacy," he says, “but too little attention has been paid to people who hold a pretty substantial amount of money and are at the end of their life cycle."

Word recall

The researchers studied data collected from 1998 to 2014 by the University of Michigan Health and Retirement Study, which tracks a sample of about 20,000 people ages 50 and up that is demographically representative of the U.S. population.

Every two years during the study period, the Michigan study asked respondents to rate their ability to remember things, ranging from poor to excellent, and to assess whether their memory had changed over the prior two years. Participants were subsequently asked to recall two lists of 10 words apiece, giving them a memory score between 0 and 20.

For this new study, those whose memory scores decreased 20% or more over a two-year period were considered to have experienced a severe memory-loss event. More than 60% of the sample experienced at least one such event during the 16-year window, although in many cases, the memory loss represented typical aging and not a serious condition such as Alzheimer’s disease, the researchers said.

Severe memory-loss events can happen at relatively early ages, 67 on average, and sometimes well before retirement, researchers said. Overall, 20% of the sample experienced multiple such events.

Unaware vs. aware

The findings show that seniors typically are unaware of their cognitive decline: Among those with severe memory loss, only 20% rated their memory as being worse than it was two years prior, while 77% said it was about the same and 2.6% rated it as better.

Participants in the sample had an average net worth of about $379,000, with a median of about $190,000. Those who experienced a severe memory-loss event over the prior two-year period and were unaware of it saw their wealth decrease by about $31,000 on average.

Meanwhile, those who were aware of their cognitive decline or never experienced memory loss saw their wealth decrease by less than $5,400 on average over that two-year period, according to the researchers. That modest level of wealth loss suggests that those seniors are spending down their assets rather than losing money to poor investments, the researchers said.

Some of those losses may be from scams, and seniors are indeed more likely to fall victim to swindlers, the researchers said. But the data showed that losses were concentrated among those in the upper 25% of wealth distribution who were unaware of their cognitive decline and reported being active in the stock market, the paper said.

Those who were aware of their memory loss likely avoided large financial hits by delegating decisions to family members or financial advisers or by choosing safer investments, the researchers said.

“A large percentage of the losses that we measure are coming from stocks," Peracchi says. “People participating in the stock market often start with high cognitive abilities, so after losing some memory, they may be overconfident in their abilities. They’re not aware that they’ve lost memory, so they’re more susceptible to financial losses."