Transferring Control of Finances: Timing Poses a Risk

As older Americans approach the end of their lives, many have to make major financial decisions, including estate planning and long-term care arrangements. Unfortunately, with age comes the risk of cognitive decline, which may affect the quality of such decisions as well as making people easier targets for financial scams. One way to help individuals protect their finances against mistakes is to involve a third party (an “agent†), commonly a family member, to take over financial decisions. But several conditions need to be met to make it work. First, the agent must be capable of making good decisions on behalf of the individual and be trustworthy. Second, the agent must be available when needed. Lastly, the transfer of control must be made at the right time, in particular before the aging individual makes irreversible mistakes. This brief, which summarizes a recent study of the authors published by the American Economic Association, assesses the perceptions of individuals ages 55+ about the roles and limits of an agent in addressing cognitive decline, based on a sample of retail investors at the Vanguard Group. The discussion proceeds as follows. The first section provides background on the prevalence of cognitive decline and related financial mistakes; and it describes the survey and the sample. The remaining sections summarize the results of the survey. The second section reports that most respondents are confident that they have a suitable agent in mind. The third section explains, though, that respondents anticipate a significant chance that they might transfer control too late, primarily due to a failure to quickly detect their own cognitive decline. The fourth section summarizes the consequences of delay – respondents think it could substantially damage their finances and well-being. The last section concludes that any measure that can help the timely detection of cognitive decline could protect against serious financial mistakes, thereby improving late-life financial security.