MARK RIEPE: I don’t know how many episodes we’ve done of this show, but I do know one thing and that is we spend a lot of time pointing out flaws in the decision-making process of humans.
What we don’t do often enough is acknowledge just how difficult decision-making is. Some of that difficulty is because some decisions are just plain hard. There isn’t an obviously right or wrong answer.
But the rest of that difficulty is because we have so many decisions to make that it’s impossible to be perfectly rational all the time.
I’m Mark Riepe, and this is Financial Decoder, an original podcast from Charles Schwab. It’s a show about financial decisions and the cognitive and emotional biases that can cloud our judgment.
According to one estimate, the average adult makes about 35,000 conscious decisions every day. That’s pretty taxing on our brains, but it gets worse. In order to make a decision, you usually need some information to help you decide. Just during our leisure time, it is estimated that Americans process 34 gigabytes, or 100,000 words every day.
That’s a bit abstract, so here’s a point of comparison. The epic Russian novel War and Peace by Leo Tolstoy contains 430,000 words.2 That’s a lot of data, and the amount of data is growing. In fact, 34 gigabytes is five times as many as we took in in 1989.2
Fortunately, our brains are pretty impressive organs and they develop rapidly in order to handle all of this. But like all the organic material in our bodies, there does come a point in time when age starts to set in.
As we get older, it’s normal to see some changes around memory. In middle age, it might be harder to multitask or remember appointments.
Our ability to recall new information, such as reading material, gradually becomes more challenging after age 40. By the time we’re 70, when we hear a story, we may recall only 75% of what we would have remembered when we were 18.5
It’s not all bad, of course. According to the National Institute on Aging, despite some decline in cognition and memory, older adults still learn new skills, form new memories, and continue to grow their vocabularies.
Not only that, older adults generally understand the nuances of a word’s meaning better than younger people. And—perhaps most importantly for what we talk about on this podcast—older individuals have a vast reservoir of knowledge and experience to call upon when making investing decisions.
So the upshot of all this is, we live in a complex world that’s getting more complex. but as our brains age, we’re less able to sort through all that complexity.
It’s not an ideal combination. And while our ace in the hole is the experience and knowledge we’ve gained over the years, it’s still a good idea to understand that eventually, we may need a little more help.
On this episode, I get to speak with two experts on this topic, and they’re going to share with us some techniques to help us protect ourselves.
Joining me now is Joel Sauer. Joel is the director for senior and vulnerable investor investigations in Schwab’s Financial Crimes Risk Management division. And he’s a Chartered Financial Analyst, as well.
Joel, thanks for joining me today.
JOEL SAUER: Thanks, Mark. Glad to be here.
MARK: Joel, we talk a lot about cognitive and emotional decision-making biases on this show. But one of the biggest hurdles, one of the biggest risks, that I think we have when it comes to managing our finances can sometimes just be the simple passage of time. How does our decision-making capacity, how is that affected as we age?
JOEL: Sure. So depending on how you want to measure it, financial decision-making capacity appears to peak around in your 50s or 60s. What happens after that really varies widely by person. There are some lucky few—I hope to be one of them, maybe around 10%—who really don’t see significant decline after that, no matter how long they live. But most of the rest of us will experience some type of decline. For some of us, it may be kind of a more shallow trajectory, you may never get to more than mild cognitive impairment over your lifetime. But for many people, the trajectory at some point, tough to predict when, turns sharply downward, oftentimes driven by some type of dementia. It’s really difficult to predict. It looks different for each person.
MARK: You know, there are a lot of different elements of financial decision-making. Does that decline occur at the same rate for all different types of decisions, or does it vary?
JOEL: It really is different. Each person has their own signature, almost, for how the decline works. Their calculation skills, how well you understand how different investments work, and then your judgment in really just putting it all together, each of those can decline at different rates. So you may see somebody who really are still very sharp figuring out how much a return might be, but yet they really lose track of how investments work. You may have somebody who really understands everything well, but their judgment, we see this quite a bit, their judgment just fades, and even though they understand the issues, they just can’t put it together to make a good judgment at the end, and they often wind up being led down the wrong path.
MARK: So, obviously, that creates a lot of risks. What are the typical risks, financial risks, that a retiree makes? And what are some of the risks associated with this decline, which may creep up unexpectedly, or just … people just don’t appreciate the magnitude of them?
JOEL: Less commonly considered, but I think also really very important, are the risks of loss of financial decision-making capacity, as we just discussed. Not just of the retiree, but also of their spouse. The retiree may decline, as we talked about before, and that’s often not recognized unfortunately until some major problem arises or a major loss occurs. People are very good at coping with that type of decline, and so it’s often not recognized until there’s a big problem. Loss of a spouse, whether the spouse was the decision-maker or not, can also impact the overall decision-making ability of the family. And then, importantly, there’s also a loss of network over time as you age. You may have a trusted advisor that you work with, and they may have retired or relocated, or you relocated. And, oftentimes, too, people lose contact with family, friends. In general, networks of people, as they age, tend to degrade, and all of that can really impact your overall financial decision-making capacity.
MARK: One of the things that makes this a challenging topic, I think, is that many of the older investors I know, they’re independent-minded, they pride themselves on their ability to manage everything themselves. What would you say to someone who is considering the fact that they may need to engage with someone else at some point to advise them on their finances?
JOEL: We run into that all the time. And that’s ... you’re talking about the prototypical Schwab investor, right, somebody who wants to make decisions on their own and has for a long time. Prior to joining Schwab, I worked for some very successful investment managers. And as I spent time with them and then saw how they worked, I came to understand that their success was not due primarily to them picking great investments and executing them on their own, it was really their skill at building a team and a broader network, people that could help them out, help them evaluate their ideas, help them come up with new ideas, help them execute their ideas. Nobody is really an expert on every different part of the process. And the success as an investor often comes from being a leader, not directly managing every aspect of the process. And I think individual investors need to think about things the same way. They really need to maintain a network of family, friends, financial advisors, who can work with them to help them become successful.
As we age, as our network ages, we need to work to maintain it. It doesn’t just stay in place forever. And even if you didn’t really work very much with a financial professional when you were younger, you know, you maybe just called up to execute trades or asked for some information here or there, as we age, it really does make sense to add a financial advisor of some type to your network to help address the complexity of the upcoming issues that we’re all going to face—financial planning, estate planning, etc. It doesn’t mean that you’re turning everything over to them, it just means that they’re part of your network, a resource that you can leverage as you get older.
MARK: I think it’s almost as if people are afraid of losing control, but building up and maintaining that strong network, it’s as if that allows you, actually, to maintain control even longer.
JOEL: That’s exactly right. The people that we see losing control of their finances prematurely, it’s often because they wind up becoming isolated. They don’t plan ahead. They don’t maintain their network. And so it’s typical as they maybe begin to succumb to some level of diminished capacity, they’re not equipped to manage that. They don’t have people around to help them recognize it. And they can’t stay in control because they don’t have the support, and so they wind up really sometimes in very difficult situations.
MARK: So let’s say we suspect that someone we know, maybe a family member, maybe a friend, they may be in need of help with their finances. What’s the best way to reach out?
JOEL: The most important part of this outreach is timing. You have to reach out as early as possible. Really, you should be reaching out before you see a significant problem. The main obstacle to success with these types of engagements is the fear of losing control. The investor is concerned that this outreach means that you’re trying to take away their ability to control their finances. So if you wait too long, the person you’re trying to help, unfortunately, may ultimately be unwilling or even not unable to engage with you. Sometimes a diminished capacity has an element of paranoia with it, and people believe that someone is trying to steal their money whenever they start to ask these type of questions, and you really can’t have a productive conversation. So you really need to get involved as early as possible, or else you will be faced with some very difficult choices at the end about trying to basically force your will on someone. And that’s just not an easy thing to do.
So reach out early, and then work at the beginning of the discussion to build trust. Engage on less sensitive subjects first. Don’t just come in there with guns a-blazing, insisting that your parent or loved one do this or that. It often takes multiple conversations to build up that trust and make some progress. Another important strategy is to make the conversation a two-way street. Don’t just talk about them and their situation. Talk about yourself. If you’re old enough to reach out to your parent or loved one to ask about their financial and estate planning situation, you’re probably old enough to really do that yourself. So you can talk to them about what you’ve been doing and help them understand that it’s a normal part of the process.
MARK: Is it best to go it alone or does it help to get some allies, if you will, you know, to show more of a united front, if you will, to discuss these issues?
JOEL: It’s always better to eventually bring in other trusted people to the conversation. You don’t want them to believe you’re ganging up on them, but, eventually, you do want to include other family members or other parts of the person’s network. The ultimate objective of these discussions, though, is to encourage some action on the part of the senior. But you should always help them understand that your intent is for them to remain in control, encourage them to reach out to a financial advisor or a legal advisor on their own, right? You might give them some ideas, but, ultimately, you want them to see that they will remain in control of the decisions that will happen over time.
MARK: And I think that kind of connects back to what you said at the very beginning. The sooner you have these conversations, the better, because the longer you wait, the more difficult it is to get an outcome where the person is participating in the … you know, in some of the decisions.
Let’s get more specific here and talk about specific types of fraud and the kind of scams that are out there. What sorts of things should people be on the lookout? What are the common elements, if you will, of typical scams?
JOEL: Sure. It’s important when you’re thinking about scams to realize that this is really a big business. This is not just some one-off person, for the most part. These are organized groups around the world that are targeting all of us. They have pretty sophisticated techniques. They refine them all the time to try to target you, specifically, and to deal with new vulnerabilities that they see.
MARK: Have you seen any innovations, if you will, if that’s the right word, in scams due to the pandemic?
JOEL: I don’t know if I would call it innovations, but we have seen probably a doubling in the level of scams since COVID really took off. Not so much because of some clever new innovation. At the end of the day, all scams kind of have the same types of elements. It’s really just because of the increased vulnerability. People are losing touch with their networks. They’re much more isolated. They’re not able to go in and meet with people, say, in their broker’s office, or just to see family members or other friends to talk about things. So they’ve recognized that people are more isolated and then more vulnerable. So that’s really what … it’s not any genius new ideas. It’s just, people are more vulnerable since COVID because everyone is more isolated. And also a lot of people are going online for the first time that really didn’t go online as much before, and that creates some vulnerabilities, as well.
MARK: So, ultimately, what are the scammers … what do they want? What is it that they want from you?
JOEL: It’s pretty simple. They want one of two things. They either want you to send them money, or, increasingly, what we see is them trying to get personal information out of you, account information, access to your personal devices so that they can steal your identity and then steal your money later.
MARK: Earlier, we were talking about the fact that, really, the primary techniques are to gain trust and create a sense of urgency. So could you talk about both of those? Why don’t you start maybe talking about what the trust angle of this. How do they gain your trust?
JOEL: Sure. There are a number of different strategies, and this is critical. They understand that they can’t … until they overcome your natural hesitation, they’re not going to get very far. So there are a number of different strategies here. They will do research on you ahead of time, often, try and use information they learn about your family, friends, what your career was, what your interests are, what your investments are to try to convince you that they understand you, and that they’re looking out for you. They will often impersonate a friend or some kind of known service provider or government agency, somebody else authoritative, to help you believe that you can trust what they’re telling you. They will sometimes share almost always fake information about themselves, generally, to try to gain some type of sympathy, you know, that they’ve got a sick child or that they are trapped overseas. COVID, that’s the new strategy with COVID is to say, “Oh, I’m stuck somewhere because of COVID.” But it’s the same strategy that we see all the time. Whatever the newest story is in the world, they will say, “Yes, that’s impacting me. You know, I’m trapped because of this war” or some other situation. Oftentimes too, they will send you funds to try to make you think that they have skin in the game, that they are legitimately trying to engage you on something. But it will always turn out later that the funds were fraudulent, either a doctored check or some other type of fraudulently obtained funds. A common scam now tied in with COVID is the various COVID relief programs. People will send those funds in an effort to convince them that they’re part of some sort of legitimate business, but then, ultimately, it turns out that those COVID relief funds were either fraudulently obtained or it’s really just a doctored check, not actual legitimate funds.
So there are a lot of different strategies to gain your trust. But then the conversation will always turn towards creating some type of urgency. Either there’s an emergency for you, or there’s an emergency for them, or sometimes both.
MARK: So let’s … Joel, let’s assume that the fraudsters, let’s assume that they’ve connected with you. How do they lure you in? What are their specific tactics? And then what are some techniques that you’ve come across that are effective for resisting those tactics?
JOEL: Sure. There’s always ways to beat the scammers. Keep that in mind. You should never feel like it’s a no-win situation. If you’re facing a scammer who is impersonating a friend or relative, maybe they hack their email or social media and they send you a message encouraging you to contact someone else or take advantage of some investment offer, the solution there is simple: Just reach out to your friend or relative directly using a known phone number. If somebody is sending you something interesting that sounds maybe too good to be true, or certainly if they’re asking you ultimately to provide them with any kind of personal information or funds, just call the person that you know directly.
Similar story when somebody is trying to impersonate a government agency or a business that you work with, they will often set up a fake website. Sometimes they will hack their email, or even sometimes they will place malware on your computer that will force you to go to the fake website instead of to the legitimate site. And there are a couple of strategies here. One is, if you have a site that you often go to, say, for your brokerage firm, always bookmark that site. Don’t Google it each time. Create a favorite or a bookmark so you can just go directly there because oftentimes these fake sites pop up when you Google them. They’re designed that way so that you accidentally click on the wrong link. So it’s important for people to understand that no legitimate caller will ever ask you for your account password on the phone. They might offer to reset your password or help you figure out other things about your account, but no legitimate caller will ever ask you to provide your password. So please do not provide your password over the phone.
There are a lot of really good tips for how to protect your accounts, how to protect your devices, on schwab.com, on the Schwab Safe section, which is right off the main page, or you can search for that.
MARK: Joel, most people that you deal with, that I deal with, that we all deal with, they tend to be polite and they observe, you know, sort of the common social norms. Is that something that can be kind of turned … that the scammers, the fraudsters, can turn against us?
JOEL: Definitely. Scammers often take advantage of this, and we see people all the time who let themselves be victimized because they don’t want to offend the scammer. I always think of an example of a really audacious scam that we heard about, where an individual was convinced to pay upwards of $80,000 for these really lavish spa treatments. It really made no sense. And after speaking with this person, they understood that this really did not make sense. They didn’t want it. They understood that it was a scam. But they just felt so badly because this person was going to earn this great commission and get into this new status, and they felt like they had already kind of promised to do this. And very sad, but even working with the family, we could not convince this person not to participate in this scam because they just did not want to go back on what they viewed as a promise they had made to the scammer. At the end of the day, this is your money. You should never have to apologize or feel bad for asking questions, or even for hanging up and saying that you need to take more time to consider the situation, that you’ll get back with them later. It’s just these are important decisions that can’t be rushed.
MARK: Let’s say you’ve entered a situation where you think you’ve been the victim of a scam. My guess is the inclination for most people is to not report it because they’re embarrassed. Have you seen that?
JOEL: Yes. Unfortunately, there’s some really ugly statistics out there. Anywhere from only maybe one in 10 to one in 40 victims of exploitation actually wind up reporting it. It’s very much an underreported event. But people really shouldn’t be embarrassed. Everyone is scammed, all ages. It’s important to report it both to law enforcement and to your financial institution as soon as possible. The reporting not only protects you, but it also helps protect other people because then everyone knows who the scammers are. We can try to prevent other people from being victimized in a similar way. And you don’t ... if you report a scam, you figure it out and you report it, it helps actually build confidence. The people who get that report, the people on my team, they understand that, “Hey, this person figured it out. They understand now that it’s a scam and they’re unlikely to be victimized in the future.” So it actually helps to build confidence to report that you’ve been scammed, because it shows that you figured out the actual underlying strategy.
MARK: Joel, let’s say you’re investigating making an investment, and it’s a private investment, not on a public exchange. Is there kind of a checklist that you should review or verify before you actually send that check or transfer that money to make sure it isn’t a scam?
JOEL: Yes, there is. Private investments, they can be legitimate. They can be worthwhile. They can actually be very lucrative. But they do involve a lot of risks that you don’t face when you’re buying a publicly traded stock or mutual fund. The successful investors I’ve seen that invest in private placements like this, they take a lot of time to conduct due diligence, both on the investment and on the people that are selling them. And so you really need to do the same thing. You should always request offering documents and financials for the applicable businesses, and make sure you actually review those. You should get the full name of the person and the company that are offering the investment and check them out. You can check anyone who is selling an investment on brokercheck.org, and you should generally see that they’re licensed to be able to sell that type of investment. You also might want to check with the Better Business Bureau. And ask them to explain to you what the risks are. Don’t just listen to what the benefits are and how much money you’re going to make. But a legitimate salesperson should be prepared to discuss with you what the risks are so that you can make an educated decision. If they’re not willing to do that, that’s really a big red flag.
MARK: Joel, you’ve mentioned a couple of times that people of all ages can be the victims of some of these scams. Do you get the sense that certain types of scams tend to be more targeted to people of certain ages?
JOEL: Definitely. People of all ages are scammed, but people target people based on what they think their vulnerabilities are. In general, people perceive older investors to be more vulnerable, and they also obviously have more money, on average. So they’re targeted maybe more often for certain types of scams. But people of all ages are targeted.
A younger person may be targeted by a scam that involves a home purchase, where the title company has their accounts hacked, and they will send out an email to this first time home buyer giving them bogus instructions on where to send funds for their down payment. And somebody who maybe hasn’t been involved in that process before might not understand that you really always need to call and check and make sure you confirm all the payment instructions before you take any steps.
Whereas an older person may be targeted by a different type of scam. A home purchase is something they’ve maybe done a few times, and so they’re less likely to just rely on one message to send hundreds of thousands of dollars. But they may have a grandchild who they don’t see very often, and so they may be convinced that that grandchild is in trouble somehow, been kidnapped or been arrested or something like that.
MARK: You talked earlier about the importance of having a network of friends and family. Can you talk more specifically about the role adult children can play in helping to protect their parents?
JOEL: Adult children can play a really important role, but it takes some time and some patience. They should always reach out and make themselves available as part of their parents’ network. But it takes some time to build trust. They should be having regular conversations with their parents about finances, but not just about their parents’ finances. To really build trust and have a fruitful discussion, it’s often useful to talk about your own finances. You can also talk about protecting your computers and personal information. Everybody has to worry about those risks, right? Not just your parents. So talk about what you’re doing. Get their advice, right? The more the conversation goes both directions, the more trust you’ll build. And if you become an important part of their network, hopefully, they will reach out to you as the first call or an early call to discuss any kind of problems or concerns. And, hopefully, too, you will then be there to recognize as they start to decline, if they start to decline. Encourage your parents to seek advice. Don’t tell them what to do but encourage them to seek advice from an advisor on financial planning or estate planning. It’s important that they always understand that your goal is not to take away control, but to help them stay in control. So you always want them to be in the middle of these relationships. And just express an openness to serve as a trusted contact, or eventually as a power of attorney or trustee, whatever the arrangements wind up being.
MARK: Joel, this has been just a lot of great information. A lot of sobering information, as a matter of fact, but certainly information that we all need to take seriously.
Joel Sauer, he’s a managing director in Schwab’s Financial Crimes Risk Management division. Joel, thanks for being here today.
JOEL: Thanks for having me, Mark. I really appreciate your focus on this issue.
MARK: Joel had lots of good advice—including the fact that you have to take active steps to protect yourself online.
At a minimum this includes:
- checking your account for suspicious activity,
- verifying payment requests,
- being careful not to share personal sensitive information on social media, and
- being cautious when anyone asks for your personal or financial information.
That’s a lot to remember and so we have a full online security checklist you can review at Schwab.com/SchwabSafe. That’s Schwab.com/SchwabSafe.
Next, I’m going to speak with someone who advises investors on how best to adapt their portfolios and their plans as they get older.
Joining me now is Nancy Murphy. Nancy is a CERTIFIED FINANCIAL PLANNER™ professional and Accredited Estate Planner. She has extensive training and experience in a broad range of investment and financial planning issues, working with all types of clients. Nancy, thanks for coming on the show.
NANCY MURPHY: Thanks, Mark. I’m so happy to be part of this discussion.
MARK: So, Nancy, this episode is about the vulnerabilities that investors face as they age. In a way, it’s really a type of risk, right? And we know that one purpose of a financial plan is to address these types of risks. So what are these risks that you’re discussing with clients when setting up a plan?
NANCY: Well, risk management is one of the most important—but it’s easy to overlook—areas in financial planning. It doesn’t have all the glamour and appeal of, you know, GameStop purchases and buying that perfect stock and seeing that increase, but it is really a critical piece. During your working years, we want to make sure that the what-ifs of losing an income are covered through life and disability insurance. For most of your career, your biggest asset is your ability just to get up, go to work, and earn a living, and it’s important to protect that.
We also encourage clients to think about their property and casualty insurance, and, particularly, liability coverage. Liability coverage is the type of insurance that’s put towards settling a case if you are sued because you cause an accident or someone injures themselves on your property. So our general rule of thumb is to have at least one times your net worth in liability coverage. And for a lot of our clients, that means that they will have not only an auto and a home insurance policy, but a third what’s often called an umbrella policy for that liability coverage.
One of the biggest risks when we get into retirement is the risk of losing our independence and our health and the risk of a prolonged and expensive need for care as we get older. And many clients will try to kind of joke about that. They will, you know, present all kinds of wild ideas like they’re going to move into a trailer down by the river. But there really is a lot of anxiety about the impact that has not only on their financial resources, but family relationships, as well.
MARK: As we’re recording this, the state of the COVID-19 pandemic, it’s certainly improving, but, unfortunately, it’s by no means over. What do you see as some of the biggest risks for people who they maybe already have a financial plan or an estate plan, but those plans weren’t really built with a pandemic in mind?
NANCY: Yeah, it’s been interesting, Mark. I’ve had conversations with clients whose plans are based on the idea that they will be downsizing their home and living on those proceeds. And now they find the kids have moved back into the house. They’re there indefinitely. They’re happy that they’re there, and they’re happy to be able to help them, but it does change the picture and the retirement outlook for them. On the positive side, many of us now have a really clear idea of what our core spending is. We’ve stripped out travel and eating out and spontaneous spending for an entire year, and we’re left with the basics. I’ve heard from some clients that they can’t wait until they get to travel again. I’ve also heard from some clients who say that their appetite for travel is diminished. Seeing family and being together has replaced the urge to travel abroad to exotic locations, but they may want to increase their spending for large family gatherings. All of that indicates that it’s a good idea to revisit the spending expectations now and for the future, because a sudden surge in spending coupled with a sudden downturn in the market could be devastating to a plan.
MARK: Yeah, I think revisiting that plan, that’s an important concept because you don’t want to take it as something that you’ve chiseled in stone and you’re never going to change or revisit, because, you know, as you just mentioned, things change for people.
One of the biggest retirement decisions is when you actually retire, is, you know, what is that date? When do you separate from the workforce? How has the pandemic changed that decision-making process for people?
NANCY: Well, you know, here’s another thing, we are hearing both sides of that, too. You know, we’ve heard from people who decided to retire early, and we’ve heard from people who decided to keep working. You know, for those … for some people, the stress of working and trying to maintain a household full of kids who have returned from college, or, you know, from, you know, their apartments and things, it’s just been too much. And others find that once the commuting time is gone, well, the job isn’t nearly so bad, and they can see themselves working a few more years or working part-time. All of these decisions can dramatically impact the financial plan.
If we’ve learned anything this year, it’s that life can throw us some curveballs and your plan has to be able to accommodate those. One of the best descriptions I know of financial planning is precision guesswork based on unreliable data provided by those of questionable knowledge. And that includes me, too, here in that. We can’t anticipate every big event and every change. And none of us had a pandemic in our financial plan. Our lives have been uprooted and changed like never before.
In 2020, for instance, we had so much going on. We had tax filings delayed, RMDs eliminated, a market downturn, and a market recovery. People lost so much in their personal lives, but we’re all adjusting and we’re learning as we go, and it’s important to focus on the opportunities we have in front of us.
MARK: Nancy, let’s zoom in a little bit more on the theme of this … this particular episode, and that’s really vulnerability. We know that some investors are more vulnerable than others. And some of those risks associated with that increase as we get older. For someone who isn’t sure that they have all the right legal protections in place, let’s go through some of the … some of the basic documents that people need to understand. Let’s start out with the legal power of attorney. What’s that all about?
NANCY: Well, what we often call the durable power of attorney is a legal document in which you name a person called an agent to handle legal, tax, financial, and other matters if you’re incapacitated. The agent can transact business for you, pay bills, maintain your investment strategy, gift to individuals and charities, for instance. Some documents also allow the power of attorney to change beneficiary designations on accounts and insurance policies. Sometimes clients will have a power of attorney that’s called springing powers and those are effective only if the client becomes incapacitated, and the agent cannot act until they’re declared disabled by medical professionals. So already you can see some issues, right? During a pandemic, it may be a challenge to find two medical professionals with the free time able to declare someone disabled.
One relatively new area that’s covered by the power of attorney is access to your computer, your smartphone, online access to accounts, bill paying, stored information and photographs, and assets such as Bitcoin. In order to comply with service agreements and federal law, the power of attorney must have your expressed permission to access your electronic devices and online accounts. And I have to say, I am guilty of that myself. My husband did not realize that I was paying all the bills online until I was getting ready to leave on a business trip. And it suddenly came home that I’m the only one who has access to, first of all, knowing what the bills are, and second of all, actually getting the bills paid.
So with regards to that power of attorney, typically, financial institutions will want to see those documents relatively fresh. They would like to see them be five years or less. So many clients that we talked to have documents that are older than their kids. So it’s definitely an area that they will want to address.
MARK: Yeah, that’s, I think, a great example because we’ve talked about on past episodes about procrastination, and what you’re really talking about is a vivid example of how if you kind of put these, you know, perceived boring tasks off to the side it can really eventually create a problem for you.
Let’s talk about another document and that’s the medical power of attorney. When does that come into play?
NANCY: So the healthcare proxy or the medical power of attorney is similar to the financial power of attorney. It allows you to name an agent to assist in making medical decisions if you’re not able to act for yourself. And that includes what therapies, what doctors, what surgeries, what hospital, what clinic, or where you’re going to recover, whether that’s at home or in a facility. So within that document often is the HIPAA release, which also authorizes the named agent to access private health information and communicate with medical providers. Without that, your agent may not be able to discuss your situation thoroughly with the medical staff. The HIPAA rule, by the way, was made law in 2005. And we’ve talked to a lot of clients whose documents date prior to that. So that medical power of attorney can cover a period of time when you’re ill or incapacitated, but you are expected to recover. So a concussion, for instance. It can also cover the final stages of life, too, or that may be covered by a third document called a medical directive, and that often is also known as a living will. And that’s specific to the period of time where you cannot recover or are not expected to recover.
MARK: Yeah, I think it’s pretty clear why these documents are especially important when we have a virus, which is, you know, primarily virulent for older people.
Setting aside the documents for a second. Are there kind of other things or strategies people need to be thinking about or considering when making or revising an estate plan, especially with COVID still at large?
NANCY: Yes. COVID has taught us a lot, and that includes estate planning. And so, as we talked before, springing powers of attorney may be impractical in a pandemic world. So you should review your existing documents and make sure, first of all, that the persons that you named as your agent and successor agent are still the people you trust and rely on. You want to, at least, make sure that they’re still alive, since we’ve had conversations with clients whose agents or executors have already predeceased them. You want to consider what forms of communication are allowed in your documents. You may want to consider allowing your agent to communicate via email or electronically signed documents, use Skype or similar services, rather than being in person. One rather shocking thing is that many older standard living will documents expressly forbid intubation or experimental medicines, and those are the very things that we use to treat COVID. So you never want to put your agent in a corner. You want to provide them flexibility to act on your behalf.
MARK: Yeah, I mean, the world changes, and you’ve got to make sure that your directives kind of keep up with those changes.
But, you know, you raise an interesting point about, about these agents. This is a really big decision, a big responsibility for these people. What kind of advice do you have on how to go about selecting these individuals? What should, you know, me or anybody else, what should we be looking for?
NANCY: Well, first of all, of course, we want to be able to trust them, literally, with your life. You know, they’re going to have access to all of the nuts and bolts of your financial affairs, for example. They are, literally, going to make decisions about your life, so you do want to have a basic level of trust there. You also may want to think about and make sure that you include someone in that successor train that … someone who isn’t living with you or isn’t in your COVID pod, you may want to include someone who is geographically close, so that they can evaluate your situation more quickly. You’ll want to make them aware of the role that you hope that they will accept and give them a copy of the documents. And you’ll want to make sure that they’re aware of any religious considerations that need to be addressed. Funeral and burial decisions should also be communicated. We did hear of an unfortunate situation where the person’s agent moved forward on cremation without knowing that the deceased was adamantly opposed to it.
MARK: You know, at the end of the day these are kind of your final wishes and it’s hard for people to follow them unless you make sure that people really understand what those wishes are, and I think that’s what a lot of this process is really about.
We’ve already talked about, you know, a couple of legal documents. Are there others that really matter when it comes to legal protection, other documents that would help protect a senior when someone is trying to exploit them?
NANCY: Well, those power of attorney and durable powers of health are the primary ones. And a lot of times I’ll have clients who will say, you know, “Well, we already have powers of attorney named on our accounts.” And it’s really important to understand that power of attorney named on an account is only valid while you have capacity. It’s a limited power of attorney. And if you don’t have capacity, then the financial institution relies on the owner of the account or a court-appointed guardian, or your durable power of attorney document. Many of those financial institutions have added some additional protections in place, as well.
MARK: Nancy, at Schwab, we ask clients to specify someone as a trusted contact. What does that term mean, and who should play that role?
NANCY: Well, Mark, a trusted contact isn’t necessarily the same person who would act as your power of attorney, for instance, they may not have the investment, you know, knowledge and experience, but they are someone who would be able to respond if we notice something odd in your behavior. For example, if someone who normally is a dapper dresser shows up at the branch unannounced with stained clothes and seems confused, maybe someone starts showing up with a healthcare worker or a friend who seems to be controlling their actions, that trusted contact is someone who knows your usual habits and can evaluate whether there’s something physically or mentally off about your behavior.
MARK: Nancy, let’s kind of move on to a kind of a different topic. We’ve had other Schwab people on the show who work directly with clients. And one thing I’ve heard a few times from them is how they are starting to hear from clients who haven’t been super engaged with their financial or their investing life, and, suddenly, they’re kind of coming out of the woodwork. Have you had that kind of experience? Have you heard from people who haven’t really looked at their estate plan in a long time, or maybe they’ve thought about revising their plan based on what’s been going on, you know, public health-wise?
NANCY: Yes, absolutely. And I think updating the estate plan has always been an issue, and the pandemic has certainly brought that forward. As I said, documents that are 20 years old many times no longer reflect where you are today. It could mean that kids are left out, grandkids left out, the executor has already passed away. Maybe you even have a new spouse that’s not named in your document. That could make for a very tense reading of the will.
MARK: Yeah, I suppose the best advice is to really to update these documents every time something changes. You know, that’s not always practical. Do you have any rules of thumb or general guidance as to how often you should be looking at them?
NANCY: We generally suggest that you review your documents with your attorney every five years. That usually catches major estate tax law changes. For instance, December 2019 was the passing of the SECURE Act, and that eliminated stretch IRAs, it also makes it a challenge to naming a trust as a beneficiary of an IRA. So as you get into your 70s, many attorneys suggest that you increase the frequency, maybe every three years, so that they can also evaluate your ability to comprehend and to act on legal and financial matters.
MARK: Nancy, this has been fantastic. Lots of great information. One final question for you. One of the most common scenarios we hear about is where one spouse is handling all the finances, and when they pass away, it’s not always easy for the surviving family members to figure out what to do, or in some cases what’s exactly going on with their investing and financial life.
What advice do you have for people who are doing all the managing of the money and advice for maybe other people, who, frankly, aren’t as involved and maybe they should be?
NANCY: I think it’s a good idea to engage with an advisor for at least some of your portfolio. That gives your spouse an opportunity to learn and gain confidence, so that if you are incapacitated or pass away suddenly, they aren’t thrown into the process of interviewing an advisor in the midst of chaos, but they have a team already in place that they’re comfortable speaking with. Remember that your confidence as an investor has been built up over years of trial and error. You started with zero dollars and you have, you know, your total portfolio now. So most of us grew that portfolio over a long period of time, but your spouse is not going to have that same gradual education. They’re going to be thrown into managing the entire thing without a lot of time to gain skills, and that can be quite overwhelming. We usually do our best decision-making when we have time to think it through and weigh our options. We don’t do well when we’re forced to make decisions under stress. Having an advisor in place is a way to protect your spouse and your legacy.
We generally encourage both people to participate in a financial-planning meeting. You know, maybe I’m prejudiced, Mark, but I think planning is where we take the day-to-day decisions about investing and the day-to-day spending and show how they come together to support the things that are the most important to you. Many times it’s an exploration of what is possible and what you can do for your family while you’re still alive, and not just at the end of your life.
MARK: That’s a fantastic final thought. Nancy Murphy is a certified financial planning professional and certified wealth strategist, and she’s part of Schwab’s dedicated financial planning team. I really hope our older listeners will really think hard about a lot of the advice you’ve been given here … you’ve been giving here. And if you’re, frankly, not older yourself but have parents who are older, I hope you talk to them about these issues. So, Nancy, thanks for stopping by today.
NANCY: Thanks, again, Mark.
MARK: One of the reasons aging is so scary is because it involves a loss of control. You’ve worked hard to become independent, and you’re proud of what you’ve achieved. You control your own destiny. That hunger for control is something we all have. It isn’t just a trait of senior citizens. There’s even a decision-making bias called the illusion of control.
It refers to the fact that we often think we have more control over events than we really do. Listen to “The Lucky Loonie” episode of the Choiceology podcast for more details.
It’s because we never have complete control over events, and what control we do have is probably a bit exaggerated, that we emphasize risk management so much on this show.
Think of it as the art of trying to predict what might happen and how we can mitigate the downside effects of those circumstances. It’s only prudent to plan for contingencies and include backup plans.
Preparing for the risks of aging is just common sense. In fact, it seems to creep up even quicker than we realize. One study looked at a variety of financial decisions and found that our ability to make those types of decisions peaks at age 53.
Now, of course we’re all individuals and everyone is different, so think of 53 as an average with a wide variance. But the first time I read that study, I was surprised the number was that low.
Whatever the age is for you or for me or anyone else there will come a time when we are not going to be able to make financial decisions as competently as we did when we were younger.
The good news is that is not an unsolvable problem. Talk to a trusted family member, friend, or financial advisor now about probable future financial decisions and how to make them.
Make sure they know what your wishes are. And always remember that it’s smart to plan for the worst and hope for the best.
And once you’ve covered all your bases, you’ll be better able to enjoy your well-deserved retirement.
Thanks for listening.
That’s it for today’s episode.
To learn more about protecting yourself, your portfolio, and your family, check out Schwab.com/Seniors.
And if you don’t have someone you can ask for advice about your plan, you can always call us and talk to a professional. We’re at 1-877-279-4476.
That’s it for Season 7 of Financial Decoder. We’ll be back in a few months with more new episodes. In the meantime, keep an eye out for more new episodes of our sister show, Choiceology. Season 7 of Choiceology with Katy Milkman launches on March 15.
For important disclosures, see the show notes and Schwab.com/FinancialDecoder.
The Age of Reason: Financial Decisions over the Life Cycle and Implications for Regulation, Sumit Agarwal, John C. Driscoll, Xavier Gabaix, and David Laibson, Brookings Papers on Economic Activity, Vol. 2009 (FALL 2009), pp. 51-101, http://www.jstor.org/stable/25652729