Do Financial Smarts Erode With Age?

As you get older, does your financial knowledge decrease?

Good question.

I do not think financial smarts necessarily fall with age. I know a lot of very smart investors of advanced years. However, a new study has come out that finds investing intelligence does decrease over time.

A scary thought. Especially for my 20 something nephew – nephew by marriage I like to point out, definitely not the same gene pool – who seems to already be lagging in this area. 

This article from MarketWatch nicely summarizes the study’s conclusions.

Increasing Age, Decreasing Financial Acumen

The key finding:

“The scores on a test measuring knowledge of investments, insurance, credit and money basics fell about 2% each year starting after age 60, falling from about 59% correct — hardly a passing grade — for those in their 60s to a dismal 30% for those 80 and older …”

Now 59% is not a great score, but 30% is very worrisome.

But Increasing Age, Increasing Financial Confidence

Compounding the problem of diminishing financial intelligence over time is that the study determined:

“Our confidence in our financial decision-making abilities rises with age. We are not older and wiser. Rather, we are older, less smart and overconfident.”

Not a winning combination for a successful retirement.

If you want to read the paper itself, you may download Old Age and the Decline in Financial Literacy at this link.

Why These Results?

My first thought was that the questions were skewed for younger investors. But I reviewed the test and they were fair. Maybe one or two questions that might stump an elderly individual who has not dealt (extensively) with tax deferred investment accounts. But overall, not much that should cause difficulties simply because of age.

The MarketWatch article provides 10 of the questions in their own internal quiz, if you want to see how well you do. The linked study provides all the questions. Note that as it is a U.S. study, some questions have an American slant.

Some argue that cognitive ability decreases in general as one ages. Another study found that “financial mistakes follow a U-shaped pattern, with the cost-minimizing performance occurring around age 53”. As one gets older, there is an increasing level of financial errors made by individuals, on average.

While I do think the study questions were fair for all age groups, I also believe that new financial products, tax schemes, and regulations all add complexity to investment decisions. Unless investors maintain their knowledge level in new investment related developments they will quickly become out of date in their skills.

What to Do

The linked MarketWatch article provides some good ideas for investors on dealing with declining financial acumen over time.

The general point is to be prepared ahead of time.

Get your investment game plan ready before your financial smarts start to erode. If you stay sharp and not overconfident, great. But if you slip you will still be in good shape.

For me, an Investment Policy Statement (IPP) is the best method of developing a proper game plan.

Prepare one now and fine tune it over time to cover your changing objectives, constraints, and personal circumstances. A written IPP will help keep you on the straight and narrow over your investment life.

An IPP will assist in making the optimal investment decisions for your individual situation. It will temper any propensity for overconfidence and aid in reducing investment mistakes.

If you lack the competency to create or monitor an IPP, get professional advice.

While I recommend a low cost approach to investing, obtaining professional assistance may be money well spent. Even for those who think they know how to invest, a second set of truly objective eyes may provide excellent value for the cost.