As we age, many of us tend to feel less sharp. Memory, language skills, and processing speeds slow down, and it gets harder to multitask, problem-solve, and think in abstract terms. So it's natural to worry about cognitive decline: When AARP surveyed adults over age 40 last year, six in 10 said they believe cognitive decline is inevitable.
"While many people never experience significant cognitive decline, everyone is at risk," says Joel Sauer, CFA®, director of senior and vulnerable investor investigations at Schwab. A 2018 Mayo Clinic study estimated that 15% to 20% of those over age 65 suffered from mild cognitive impairment, which is when changes in thinking interfere with day-to-day activities. And a study released last year found that about 10% of those over 70 suffered from outright dementia.1
"We can all suffer from overconfidence when it comes to our finances and other areas of our lives, particularly as we age," Joel says. That's why it's so important to establish a plan for potential diminished capacity while you're still young and healthy.
"The costs of inaction are high," says Austin Jarvis, director of trust, tax, and estate at the Schwab Center for Financial Research. "If you're incapacitated without a plan in place, it can upend your finances or allow others to make financial and medical decisions on your behalf that may go against your wishes. And nobody wants that for themselves or their loved ones."
Aging gracefully
Tackling a few simple tasks now can help you maintain control of your finances throughout your life.
- Build your network: Forming strong bonds with people you trust can make it easier to ask for help if the time comes. Two types of individuals, in particular, can assist with both day-to-day matters and larger concerns in the event of cognitive decline:
- A trusted contact is a designated family member or close friend whom Schwab may contact if you are unavailable or to address concerns regarding your account, such as suspected financial exploitation.
- A financial advisor not only helps you meet your financial goals but can also help you adjust your plans as your needs change. "Many advisors have been trained to explain options in concrete terms since some clients may have difficulty with conceptual planning," Joel says. This can mean presenting investment choices in terms of specific goals rather than abstract concepts like risk capacity.
- Streamline your finances: Consider consolidating multiple bank, brokerage, 401(k), and IRA accounts. "It's hard enough to keep track of even two or three when you're younger," Joel says. "Simplifying your accounts can make things easier for you and anyone else involved in your finances."
- Consider long-term care insurance: Austin recommends considering long-term care insurance in your 50s or early 60s—generally the most cost-effective time to buy a policy—to offset the high costs of nursing care in the event of significant cognitive decline. The average annual cost of care in a nursing facility is nearly $95,000 a year for a semiprivate room and more than $108,000 for a private room, and the average stay is nearly 2½ years.2
Streamline your finances
Learn more about the benefits of consolidating your accounts.
Handing over the reins
While the hope is you'll never need someone else to manage your affairs, it's a strong possibility for many of us. These three documents are key to clarifying your wishes well ahead of time.
- Living trust: A last will and testament takes effect after your death, so it won't address how to manage your assets in the case of dementia or other illnesses. For that, Austin recommends creating a revocable living trust, which allows you to appoint a second trustee upfront, or assign a successor trustee to take over managing the trust and its assets in the event of incapacity. When selecting alternate trustees, think not only about their skills but also about potential conflicts. "A corporate trustee can be a good option if you're concerned about, say, appointing one child instead of another," Austin says.
- Power of attorney (POA): This legal document gives a trusted individual control over any financial matters you specify, such as paying bills, making gifts, managing property, or even altering estate plans. Without a POA, a court may need to appoint a conservator to manage your financial affairs. "Durable POAs are preferable to springing POAs," Austin says. "Springing POAs take effect only when the creator becomes incapacitated—which can be difficult to prove—while durable POAs take effect upon creation and until canceled by the creator."
- Advance directive: Also called a living will, this legally binding document allows you to spell out your preferences regarding medical intervention and end-of-life care. "Even the best health care directive covers only those situations you explicitly include in the document and so can't account for every eventuality," Austin says. "That's why it's wise to also create a health care proxy (sometimes called a medical POA), which gives a loved one the legal authority to make medical decisions regarding any situations not covered by your directive."
Corporate trustees
For more information on corporate trustees, visit Schwab Personal Trust Services.
Involving others
It's vital to have a plan that ensures you have others who can help if you ever have difficulty making decisions. Sites like The Conversation Project offer tips for getting these discussions started.
"It's estate planning from the heart," Joel says. "You're building a trusted team that is deeply familiar with your situation and can assist you when you may need help."
1VA Freedman, JC Cornman, and JD Kasper, National Health and Aging Trends Study Chart Book: Key Trends, Measures and Detailed Tables, 2021.
2Genworth, Cost of Care Survey, 2021.
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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
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The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.