How to Safeguard Finances Against Cognitive Decline
At least one in 10 seniors will be affected with dementia, but family members can take several approaches to assist with the financial decision-making.
Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Dementia is growing issue in the elderly population and that has implications for retirement planning. Joining me to discuss this topic is Steve Starnes, a financial planner with Savant Capital Management.
Steve, thank you so much for being here.
Steve Starnes: Thank you so much for having me.
Benz: The issue of dementia in the elderly population is a growing concern. How likely is it that men and women will be affected by dementia during their lifetimes?
Starnes: Unfortunately, a lot of people will be affected, approximately one in 10 men and one in 5 women. And for people over 85, 50% of them are affected by dementia. So it's quite a significant risk.
Benz: And why is dementia growing as a risk for the population.
Starnes: I think a primary factor is people are just living longer, and the medical community is still trying to figure out what causes it and what they can do about it.
Benz: A lot of issues can crop up when people have a diminishment in mental function. And a lot of these issues relate specifically to household financial management. Can you talk about some of the typical pitfalls that someone with dementia might fall into?
Starnes: One of the really important things for us all to recognize and the medical community has shown is that difficulty with personal finances is one of the first things people have trouble with in the very early stages of dementia. What that means is people may make some mistakes with their finances, make some very expensive mistakes, before family members or friends really know there is something wrong.
So this can be anywhere from disorganization, not paying some bills, to making some really expensive mistakes. I had a person come, to me and before coming to me had taken all of their money out of their IRA account in one year.
Benz: Which triggered a giant tax bill.
Starnes: Triggered a giant tax bill, a tax bill of $100,000. And that’s an expense most people can't afford. And he was just confused. He didn’t know what he was doing but otherwise seems very healthy.
Benz: I think a natural question for a lot of people who are committed, do-it-yourself investors who want to run their own financial plans is what kinds of safeguards can they put in place for their own financial plans to ensure that if, at some later date, dementia does affect them, how can they make sure that they don’t make those big expensive mistakes? Do you have any tips?
Starnes: Absolutely. One of the first and most important things you should do is have a conversation with your family. Identify who would be the person to help you if something's wrong. Then talk about your values and what kind of help you want. One of the concerns people with cognitive decline have is they worry about losing independence. And if you have a conversation ahead of time about how you want to be helped, that can really be valuable.
Second is simplify things. In the course of our lives we collect accounts all over the place, several accounts at several different banks, maybe one with a toaster, maybe one with a gift certificate, and accounts at different investment companies. It's hard for you to keep up with that, and if someone needs to help you it will be hard for them to keep up with that. Get accounts at one bank and one investment firm and just simplify it.
Benz: When you talk about naming a child or someone who will step in and help you if need be, would you suggest codifying that, getting that into your estate plan? What specific estate-planning mechanism should someone be using if they are concerned about making sure that the right person steps in to make financial decisions on their behalf?
Starnes: Absolutely. Updating legal documents is really important. So at the very least, most people should have a will, a power of attorney, and a medical directive, and many people will find it helpful to have a revocable living trust. And that person you identify who will help you if you need it should be someone who is generally responsible with money, and they would be the person you name in those documents to be able to step in when needed.
Benz: Now in terms of when someone like that would be able to step in, do the specifics of that need to be written into the estate-planning documents?
Benz: So how does that work?
Starnes: A power of attorney document gives someone the ability to make decisions for you, and that could be written one of two ways. You can write it so that this person can make decisions anytime as needed, or it can be written with a springing provision--if a doctor, for example, says you need help, this person can help you.
From a practical perspective, you're doing all this planning to make it easy for someone to help you, and I generally advise clients not have a springing provision unless there's a reason to worry about someone having that decision-making authority. I would say write the document so that this person can help you anytime that you need help.
Benz: So your child wouldn't have to jump through hoops or necessarily have that doctor's documentation to step in?
Starnes: Right. And this is also something really to talk with a lawyer about. Family circumstances can make different provisions appropriate, but I like to help clients make it easy for someone to help them.
Benz: In a related vein, I know there a lot of adult children of parents who are maybe looking at their parents' situation and might be concerned that there are some diminishments in mental capacity. Do you have any tips for those adult children, steps they can take to ensure that they are being as helpful as they can be?
Starnes: I'm really glad you asked that because that could be an uncomfortable conversation. First I would say if you're concerned, it's important to address that concern and have that conversation. As part of addressing that, it's important to recognize if your parent has some decline, they probably feel embarrassed about it, and they're also worried about losing their independence. They're worried about you telling them what to do.
Benz: They may be depressed, as well. I know that's frequently an issue with dementia.
Starnes: Absolutely. It's important to recognize if you're going to help, your role is to help. It's not to tell them what to do. Your role is to help them be as independent as possible for as long as possible. Being understanding of their concerns and their perspective can create breathing room for them to trust you and to let you help them.
Benz: I guess if they don't have updated estate-planning documents, you would advise adult children to kind of give their parents a nudge to take another look at those documents.
Starnes: Yes. I think it's like going with your parent to the doctor to help listen. I think if they have a financial advisor, offer to join them to meet that person or just to meet their attorney. Again your role is not to direct what happens, but to help your parent avoid expensive mistakes and make sure the proper planning happens.
Benz: Steve, this is such an important topic. We really appreciate you being here to share some guidance on how to handle it.
Starnes: Thanks so much for addressing this. This can help people.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.