June 10, 2011

Indeed

From the WSJ:
Declining Cognitive Ability Presents Challenges to Boomer Finances 
As Baby Boomers age, policy makers and economists may be served by looking at the condition of not just their nest eggs, but the health of their brains. 
So says economist David Laibson, of Harvard University in a speech called “The Age of Reason.” Prof. Laibson spoke at Morningstar’s annual conference in Chicago before hundreds of financial advisers and asset managers — industries grappling with the inevitable shift of assets from workers accumulating money to those trying to live on it as they grow older. 
Fluid intelligence — that is intelligence displayed in things like memory tests — decreases dramatically with age. In fact, “it’s all downhill from age 20” Prof. Laibson said. “What about the 80-year-olds? It’s the 80-years-olds who have the million dollar IRAs. Not the 20-year-olds.” 
But clearly, there’s a lot more to life than fluid intelligence. Crystallized intelligence — memory, wisdom and so on — does increase over time, but less so, on average, in senior years. 
All told, the point at which we make the best financial choices is 53 years old, according to his data. “Of course there are exceptions,” Prof. Laibson said.  
Many seniors end up in a state called cognitive impairment without dementia that isn’t quite dementia, but still (as the name implies) a deterioration of memory. In spite of this, people still may make financial decisions on their own. Prof. Labison estimated that 16% of those 71-79 years old, 29.2% of 80-89 year olds, some 38.8% of those over 90 years old are in such a state. ... 
Those people are at great risk for financial abuse. ...  
Those over the age of 50 end up paying higher interest rates, even though on average they had better FICO scores and lower default rates, Prof. Laibson said. “Middle aged people get better deals,” he said. In terms of risk-adjusted returns on investments, the young do relatively well, but the “old are doing absolutely abysmal,” paying more in fees and suffering from poor asset allocation, he said. 
Prof. Laibson called for keeping things simple for clients, while still giving them a sense of control. He called on policy makers to expand a fiduciary duty for financial advisers and expand regulations requiring power of attorney for the elderly. 
That overoptimism about mental muscle keeps people from asking for help. “We procrastinate. We don’t like complexity… We have bad memory and we don’t know the extent of our bad memory,” he said.

Personally, the last really good financial decision I can recall making was when I was 22 in 1981 and put a few thousand dollars in a 30-month certificate of deposit that paid 16.5% interest. It's been all downhill since.

Retired people with a lot of time on their hands might, however, be better at noticing and complaining when companies add small fees to monthly charges, which seems to be the main road to riches these days. For example, my wife and I spent countless hours figuring out which cell phone plan to get for the family and finally came up with a pretty good deal. But, after a couple of months, the monthly bill went up $6 per month.

Why? I don't know, because computers and bandwidth are getting more expensive I guess. I could probably dig into and find out and get it changed, but it was such an ordeal in the first place to figure out the plans that I don't have the energy to look into it.

As you get older, it gets more difficult to refocus your attention. The fixed cost investment of concentrating upon a task full of complex and arbitrary details goes up. It's like swinging the oil tanker around -- it's just easier to keep going and let the phone company grab an extra $6 per month.

38 comments:

Kaz said...

And most importantly they're highly vulnerable to scams. I think this is where having good kids to help you comes in handy.

dearieme said...

"He called on policy makers to ...expand regulations requiring power of attorney for the elderly."

There must be money in it, eh?

Glaivester said...

My best financial decision was buying gold in 2002-2004. You know, when it was $320-$400/oz.

David said...

How much fluid intelligence is really needed to invest (not day trade)? Seems there isn't a large number of moving parts and it can be handled rather methodically.

An important obstacle to successful investment is emotional. Decisiveness is main thing you need. A willingness to cut once after measuring twice.

Older people seem to have difficulty with being decisive. Perhaps they just plain know too much, and are overwhelmed by thinking of too many potential pitfalls in a given action. Is decisiveness then a result of superior IQ or of a certain happy amount of ignorance instead?

gfs said...

Completely explains reverse mortgages.

anony-mouse said...

So maybe we should send our old folks to Mexico and import their 20 year olds?

Craig L said...

Don't the elderly get enough breaks and special treatment as it is? Everywhere I look, they get discounts, get special parking, get discounts on taxes, free health insurance- Medicare, Medicaid, more SS than they paid in, etc. And they are the ones with all the $$ and the ones not raising families. Do they need more special benefits? I guess if they are the boomers, they will get it.

Anonymous said...

"So maybe we should send our old folks to Mexico and import their 20 year olds?"

Can we get our 20 year olds from somewhere else? Sweden's gotta have some, right? Or are they already over the demographic cliff?

Anyway, our immigration policy could stand to be more...aesthetically-focused. Perhaps Congressman Weiner could hold a hearing on that.

Anonymous said...

Actually, decisions like that get easier as one gets older. People over 70 should probably have most of their liquid assets in stable, low yield instruments such as CD ladders, bond funds, equities that pay high dividends. There's no need to do much with such a portfolio, maybe rebalance every couple of years.

So it appears to be something of a grab for power, to me.

Murphy's life said...

"Don't the elderly get enough breaks and special treatment as it is?"

I've seen it all, Craig. Perhaps the discounts and other benefits will balance out the grifting but I abhor the people who see the elderly as marks.

You also have to be concerned about those who were once wealthy enough not to worry about utility bills or shopping for a better deal not coping with the requirements of living on a fixed income later in life. Heck, this one I've seen in middle aged adults running through their savings after being laid off.

My own financial issue is a "penny wise, pound foolish" strategy that helps me save but doesn't necessarily guide me well in allocating larger sums of money. I suspect lots of people are inefficient money managers despite avoiding bankruptcies and foreclosures.

Anonymous said...

Clearly these results demonstrate the need to privatize Medicare and put Social Security in the stock market!

beowulf said...

Not a hard decision if you stick to age-allocated index funds. Pick the Vanguard Target fund closest to your retirement date (past or future), let John Bogle's crew handle the rest.
https://personal.vanguard.com/us/funds/vanguard/TargetRetirementList

munch said...

You are a fool if you trust "policy makers" to design policies to protest your accululated assets from your own dottering foolishness. They will rape you. Period.

You are far better off paying higher fees and getting a lower return by your own judgement than to give a stranger a tiller on your estate.

Anonymous said...

After arguing with a well-read, articulate racist Wednesday, area man Daniel Truett described the experience as "bone-chilling," telling reporters it was far scarier than any encounter with an ignorant bigot ever could have been. "I've met some intolerant assholes in my time, but never one who could quote passages from Booker T. Washington's Up From Slavery to make his point," said Truett, who raised objections to the man's racial prejudices, but found his opponent was able to anticipate each of his arguments and counter them point by point. "And the most terrifying part of all is that he's obviously intelligent enough to know he's a hateful, bigoted person, which means he must actually be okay with that fact." Later that evening, Truett felt even more conflicted after hearing the very same bigot perform an exquisite and nuanced rendition of the Dvorak cello concerto
============================

The Onion writes about one man's encounter with YOU, Steve Sailer.

Harry Baldwin said...

What are old people with savings supposed to do now that safe investments yield no interest?

Looking at retirement advice in magazines like the AARP, you see ridiculous suggestions, such as "If you're not able to put away enough savings now, consider getting a second job." Where are all those second jobs available?

Or, "Some people may have to postpone their retirement until their 70s." Who the hell is allowed to keep his job into his 70s?

I'm close to 60, but I'm increasingly convinced that my retirement savings are going to be nationalized or evaporate through inflation before I get to spend them. It's hard to see any alternative the way the economy is being handled. The upside is that I'm developing a zen-like detachment from future concerns.

Anonymous said...

ok funny MSM might be willing to admit a demographic has lower cognitive ability. based on age..... but .. race? oh I forgot that's a social construct.. well isn't age too?

gfs said...

"I get to spend them. It's hard to see any alternative the way the economy is being handled. The upside is that I'm developing a zen-like detachment from future concerns."

I take this attitude about investing in gold. It's way too late and if we're desperate enough to need gold for money, we'll be using all kinds of things to barter with anyway. Not to mention, you don't want to be the only person in your neighborhood who still has real money. People will shun you because they feel inferior, someone might kill you for it and the government might just confiscate it.

I'd rather wag around a set of tarnished silverware for currency and keep my friends. ;0)

Whiskey said...

Investing is very tricky. Even high flyers like Bill Gross at Pimco bought Lehman Bros. Debt at near face value, and got hosed. If Bill Gross can pull a bonehead move, what about the average investor? Heck even John Paulson is down this year, so it is very hard to consistently earn above average market returns year after year.

But index investing runs the risk of decades of down markets: 1929-48, the 1970's, and the 2000-present come to mind. You could invest in index funds and have all the value eaten away by inflation. Gold and Silver have storage/carry costs. Commodities swing wildly and are subject to roll-over costs. Which is why their ETFs have lousy returns.

I'd say the only safe bet is some basic asset allocation: short-term or quickly liquid assets, some longer term assets, and medium-term assets that you have done your due diligence upon based on your macro and micro environments (will the US default/inflate away? Will the Euro go bust, etc?) With frequent re-balancing/trimming the portfolio.

And that is just beyond most people. Heck not even Bill Gross can do it consistently.

Jack Aubrey said...

I get most of my investment advice from HBD sites such as iSteve.

International stocks particularly boomed in the mid-naughties. I bought in before their boom thanks to my understanding that the US labor force is getting dumber. I sold out right before the crash, understanding the vulnerabilities in the market, and protecting most of my earnings. I bought back in realizing that, thanks to cheap labor policies that favored big business, there was no way the Dow was worth only 8,000 (though ultimately it was still headed down). Then we waited until very recently to buy a new home, well after the tax credit expired, understanding that it was just inflating prices and that the market was probably still headed down. My wife sweated a little over that one. I most certainly did not.

I don't consider myself to have any great investment skills and, other than a few companies, mostly current and previous employers, I stick with mutual funds. I've certainly made a few mistakes, but understanding HBD has given me an edge and earned me more money than it's lost.

DoingOurBest said...

My husband and I (both mid-70s) have a modest nest egg but as each certificate of deposit matures we find there is no safe place to put our money that earns more than 2 percent. The banks have it made - us, not so much.

eh said...

...a 30-month certificate of deposit that paid 16.5% interest.

Those were the days -- I can remember getting about 10% in my money market account around that time.

Gene Berman said...

Craig L is too kind in his analysis.

The present dismal outlook for the U.S. (and other, similar nations with similar economies) is due to the accumulated effects of myriad socialist interferences with every-day economic affairs, one of the chiefest of which is Social Security. Such programs are simply a drawn-out Ponzi scheme which perpetuates luxuriantly because the relatively "early in" come to constitute a voting bloc not only for the program itself but for a universe of contrary-to-purpose economic interferences.

People today are inclined to let the previous generations "off the hook," explaining "they didn't know." Though partly true--and especially for the lower class (in a cognitive sense)--they certainly should have known and there were always opponents of the program making the obvious comparison to the failed Bismarkian scheme. By and large, the regular, decent, hardworking, law-abiding, and taxpaying citizens of this country are the most obviously GUILTY and are even now the most "unionized" and "lawyered up," and "lobbied up" bloc; do you think that AARP's a fraternal organization? And do you not believe that they engage in "horse-trading" of legislative favors with a far-flung network of those seeking rents on other socialistic, economy-sapping legislation?

And, by the way, those very same generations (to whom I belong--I'm 75) are those who voted, not only for a program which would collect from all black workers for their entire working lives but would blithely exclude them from a fair chance of benefitting--by setting the retirement age at about the average life expectancy of that group. (And they're the same folks who performed the same sort of hidden discrimination by voting in the tax deduction on interest expenses, assuring a one-sided benefit on the backs of those for whom it was far more difficult, if not impossible, to borrow substantially.

One of the first people to retire on the new Social Security program paid a single payment about $35, and retired the following week to (eventually) get about $25,000!

A man I knew who worked his entire life--a top-bracket contributor--and, separately, made many millions as a conservative and prudent investor, was amazed at the generosity of SS. Even when figuring compounded interest at prevailing rates, he calculated that the accumulated fund would be gone in just over 3 years--yet he lived almost 20 beyond that!

The young need to wake up and find their way to Galt's Gulch; I just don't think they will.

Anonymous said...

I thought of Steve reading that Onion piece as well and found it humorous. Not to say that he is racist, more that a liberal would instantly think of him that way having a discussion about race. I find the Onion is typically always worth a laugh, but its occasional spasms of bitter liberal articles make for periods of unfunny entries. I expect comedy writers to be left of center, but sometimes they use their platform to vent completely devoid of wit.

Anonymous said...

i was talking about investing with a friend (we are mid forties) for our retirement I think you'll have to have REAL dividend producing assest - not'invesments' in the wall street sense. A chicken egg farm, or maple syrup or something like that. that is the only security against the rampant financial fraud.

BTW that's what a lot of wall street guys are now doing... I just hope they don't turn those industries into bubbles.

Anonymous said...

yeah i bought gold when in 2003. I only wish i had bought more.

dearieme said...

Age is a social construct - v droll, Mr Anon.

Carol said...

This reminds me of my father, who actively managed his investments into his 80s, even using primitive internet connections to track prices.

Then he got too tired and sick, rolled most everything into Fidelity Contra and let it roll, retiring to the Barca-lounger just as the late 90s market took off. He could do no wrong at that point. I should be so lucky.

Anonymous said...

I think Ron Paul has the best take on all this: If the fed weren't able to fiddle with the money supply, average Joes wouldn't need to put their savings into complicated investments in order to "beat inflation" (i.e., protect themselves from their government).

AmericanGoy said...

This is a bonanza for scam American businesses (all American businesses, really).

Steve-o said something smart once that really struck a cord with me; paraphrasing: "The world's smart guys design new things to produce, new ways of making stuff; our American MBA's and smart guys design ways to obscure, complicate your bill to sneak in a bogus charge that you hopefully won't notice".


And there it is; I predict American economy to get a raise just off of that effect.

Right now I am helping my grandma - she has apparently signed onto a service which sends her horoscopes - signed up for this plan using email (she obviously has no computer nor an email account), there are "PROTECTION PLAN" entries on her credit card - after calling, the plan is to help people in the event of them being unemployed - and again, she signed up for it voluntarily...

I... I can barely take this country anymore.

Our multinational giant corporations are like the scammy, scummy auto repairman who sees a victim instead of a customer.

I shudder to think what will happen when the astroturfed Libertarian movement succeeds in even more deregulation...

Jack Aubrey said...

"Those very same generations...are those who voted, not only for a program which would collect from all black workers for their entire working lives but would blithely exclude them from a fair chance of benefitting--by setting the retirement age at about the average life expectancy of that group."

Yet somehow I find it hard to get too worked up about it, since were it not for payroll taxes the net tax receipts from that group would probably be negative, thanks to deductions and refundable credits. As it is, even with payroll taxes blacks are still net tax sucks, due to their disproportionate use of welfare and the criminal justice system.

For individuals of any race who remain employed, have well-behaved children (or none at all), who croak when they're 64 and leave no spouse or minors I do feel sorry. For much of their lives they have effectively been made a slave, unable to benefit from the income they duly earned. But for blacks as a race I feel no sorrow.

eh said...

Maybe 'declining cognitive ability' of the aged will affect their finances, i.e. how they manage them.

But I think 'declining cognitive ability' amongst the working population will prove to be a far greater problem. Since it's their work/wealth creating activity that must be taxed in order to pay benefits to the retired. And immigration is, on average, making the US workforce dumber. And dumber people cannot create the same amount of wealth.

Lucy said...

"But I think 'declining cognitive ability' amongst the working population will prove to be a far greater problem. Since it's their work/wealth creating activity that must be taxed in order to pay benefits to the retired. "

Jobs that lower IQ people do probably have a lot of mindless repetition involved. As long as these guys aren't forgetting how to drive or how to get from home to work, their years of practice should keep them productive enough. Higher IQ people don't decline as much. The research indicates that even if they develop Alzheimer's they stave off the decline for longer though the eventual drop off in functioning is rapid. The problem with lower IQ workers will be getting too old to do jobs requiring lots of physical labor before age 65.

Raising the retirement age would make your conjecture more plausible. What happens to productivity when workers retire at age 70 or 75?

David Davenport said...

... I'd say the only safe bet is some basic asset allocation: short-term or quickly liquid assets, some longer term assets, and medium-term assets that you have done your due diligence upon based on your macro and micro environments (will the US default/inflate away? Will the Euro go bust, etc?) With frequent re-balancing/trimming the portfolio.

In other words, you no idea about what to actually, specifically do.

For example, I'm debating whether or not to sell my VNQ shares today or tomorrow. ( VNQ -- Vanguard Real Estate Investment Trust ETF -- all commercial properties or property mgmt. firms, no single family residence mortgages.)

Please to me whether to keep or to sell VNQ.

Gene Berman said...

Jack Aubrey:

Your argument (and attitude) are a "dodge"; they suck.

When the pollicies (Social Security and especially mortgage interest tax deductibility) went into effect was long before the "civil rights" agitation or the introduction of affirmkative action, widespread welfare, public housing, food-stamp distribution, and the nit-picking enforcement of "equal employment opportunity law."

As a matter of fact, one could make a case that the older policies not only burdened blacks discriminately--but burdened most especially precisely the group of blacks least responsible for the burdens borne by all taxpayers; it wouldn't surprise me at all to learn that many in that category were actually driven toward more solidarity with the irresponsible riff-raff precisely on account of what must have seemed flagrant and irremediable racial dicrimination.

I want to emphasize here that I do not mean in any way to criticize
racism of the majority. My aim, which I'd originally intended to lay out in a two-part comment (of which this is the second) was to point out that The citizenry of the U.S. (and other societies exhibiting any significant racial or ethnic diversity) cannot hope for peaceful survival in the long run.

The enemy is not immigration; it is not racial or ethnic difference or animosity; it is not whatever differences exist in cognitive abilities between groups; it is not in failing education (or miseducation) of the rising generations; it is not in having crooked infiltration permeating
trade, finance, and government, nor domination of the arts, entertainment, communications, and academia by groups (such as Jews) seen as inimical to the interests of the overwhelming majority.

The problems mentioned above (and many others) are not, in and of themselves, causes but, rather, effects. They're the effects of SOCIALISM, especially in a multi-ethnic democracy. In the absence of socialism, groups, ethnic, class, or party cannot use law to advantage themselves at the expense of others; the role of the state is confined to far fewer functions, primary among which are defense and enforcement of civil and criminal codes of justice.

Life itself cannot eliminate moral hazard but, under socialism, in any of its forms, such hazard proliferates to every nook and cranny of existence. Without the benefits we term "welfare," we'd not have that burden. Without minimum wage law and "unemployment benefit," we'd have almost no problem with unemployment. Without publicly-funded education, we'd have near exactly the extent and quality of eduacation people require and see kjustification in buying (like any other good or service in the market.

I don't know how to get "there" from where we are now--don't even know whether it's possible without major disruption (and likely bloodshed). What I do know is that, if we can't, a much worse future is in store, not only for our own country but for a great portion of the rest of the world.

EVERYTHING that anyone would need to know to understand these matters can be understood by reading the Austrian econmists, especially Mises; he laid it out rather clearly as long ago as 1920-2 and later in his HUMAN ACTION. But even he didn't see (in 1942) how we could "get from here to there," when he wrote "I set out to be a reformer but became only the historian of decline" in his memoir. And, though he lived and worked for another 30 years, he never saw reason to change that opinion.

It's simply impossible to make people--individually or collectively--any better than they are. But socialism--to the dregree it is practiced--is certain to bring out the worst.

beowulf said...

One of the first people to retire on the new Social Security program paid a single payment about $35, and retired the following week to (eventually) get about $25,000!

Following week! Ha, that would have been kind of funny. It was actually 2 and a half years later and a bit less than $25 in total taxes paid.
http://www.ssa.gov/history/idapayroll.html

Munch said...

If you find or have someone you trust to manage your estate when you are old and feeble, good for you. If you have no such person, try your best to maintain what you accumulated over your lifetime and direct it where you want.

When the State or anyone steps in and takes over your affairs without your consemt, in the name of your better interest, you are about to be raped.

beowulf said...

Our multinational giant corporations are like the scammy, scummy auto repairman who sees a victim instead of a customer.

Right, just came across a new book on this topic that looks absolutely fascinating.
"In this excerpt from his new book, Fixing the Game author Roger L. Martin examines what the NFL can teach the business world about managing expectations and how CEOs are rigging the game."
http://www.fastcompany.com/1751344/fixing-the-game-roger-martin-nfl

Gene Berman said...

Beowulf:

I'd guess you're right; it's "off the top of my head"--from memory (which has an awful lot of stuff in it and is in age-fading mode).