Financial abilities decline with age, but as competence decrease, confidence goes up. What's the downside?
Financial abilities appear to decline with age, making complicated decisions about retirement all the more difficult, according to a recent study titled “Old Age and the Decline in Financial Literacy.
“Households over age 60 own half of the discretionary investment assets in the United States and are increasingly responsible for generating income from these investments to fund retirement,” states the abstract of the study conducted by finance professors at the University of Missouri – Columbia and Texas Tech University.
As people age they undergo cognitive declines closely linked with financial-decision making, say the authors, who found that financial literacy scores decline by about 2 percent each year after the age of 60. Confidence in one’s financial abilities does not undergo a similar decline, but actually increases.
“Increasing confidence and reduced abilities can explain poor credit and investment choices by older respondents,” say the authors. The combination also puts senior citizens at heighted risk of fraud. The nonprofit Investor Protection Trust estimates that one out of every five Americans older than 65 has been the victim of financial fraud.
The advocacy group AARP reported last month that older Americans have become the targets of so-called rescue scams that have been operating in the wake of the housing crisis. The scams offer help to homeowners on the brink of losing their property to foreclosure. In the first six months of 2011, 40 percent of all reported victims of rescue scams were 51 or older, a year-over-year increase of 26 percent. Losses for the age group average $3,358 per victim.
Older investors surveyed by Millionaire Corner in June show an exceptionally high level of confidence in the financial abilities. Investors 60 and older are also extremely confident in their understanding of annuities, a relatively complicated financial product that can offer fixed income in retirement and insurance guarantees. More than 58 percent of investors age 60 and up agree with the statement, “I feel I understand annuities – that is I understand how they work and the pros and cons of using them.”
Confidence is lower among younger investors. About 43 percent of investors in the 50s profess to understand annuities, while fewer than 24 percent of investors younger than 40 say they comprehend the products.
More than 68 percent of investors age 60 and older say they have a good understanding of basic stock market information, compared to 43 percent of investors age 40 and younger.