Age counts when making financial decisions

If you are over 53 years old, the likelihood is your number’s up if you want to manage your money effectively, according to a Harvard University study.

Professors at the US university found that people made less reliable financial decisions once they reached their mid-50s.

The government is taking the research so seriously that the pension industry is being urged to develop products that allow people in their 50s plan their retirements because waiting for a few years can lead to financial decision making problems.

One of the first official agencies to voice these fears is the government-run NEST auto-enrolment pension scheme.

Bad choices

The study looked at two types of intelligence –

  • Crystallised intelligence, which is skills and experienced based and improves with maturity
  • Fluid intelligence, which is the part of our brain which makes decisions based on new ideas, which worsens with age

The Harvard paper concluded that sometime in most people’s mid-50s, fluid intelligence starts to decline, while crystallised intelligence takes over in a sort of ‘can’t teach an old dog new tricks’ manner.

On top of that, when people reach their 80s, around 50% have impaired decision making that stops them from making the best choices over investments and money.

This is a natural process and is made even worse when 16% of people over 80 suffer from dementia, which increases to a third of those aged over 90.

Numbers up at 53

Other research also backs the American study.

The government’s Money Advice Service in Britain found 20% of over 50s could not pick the best financial package from two options when the average across the whole population was an 89% success rate.

Mark Fawcett, chief investment officer at Nest, argues that retirement savers should work out a budget and investment plan for their old age before they are 65 years old, so their decisions are ready to swing into action when they need them in later life.

“That way people can think about making the right decisions for their older selves when they are younger and probably better placed to work out the figures and think through their options.

“Evidence shows the older someone is, the more problems they have with numbers and working out their finances.”

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