A new study shows the ability of Americans to manage their money may decrease after they reach retirement age, but confidence in their ability to make good financial decisions stays the same.
The study, authored by Department of Personal Financial Planning professors Michael Finke and Sandra Huston, of Texas Tech University, and John Howe, of the University of Michigan, found financial literacy declines at a consistent rate after retirement. The ability to answer basic financial questions decreases as respondents age, and that rate of decline almost exactly matches the gradual erosion of memory and problem-solving abilities later in life.
That trend is worrisome, Finke says, because households aged 60 years and older control more than half of the wealth in the U.S. Since fewer employers provide pensions than ever before, more people are dependent entirely on their retirement savings.
What wa,s even more concerning, however, is older respondents didn’t report a loss of confidence in their ability to make financial decisions, the researchers say.
“This was originally one of the most surprising and alarming findings from the study,” Finke says. “As we get older, our ability to answer basic financial questions that include knowledge, and the ability to apply that knowledge, gets worse. But we have no idea this is happening. It’s veiy similar to the research on driving skills. Since it happens so gradually, we’re not aware our abilities are getting worse over time.”
In “Old Age and the Decline of Financial Literacy,” published in the journal Management Science, the researchers found average financial literacy scores fell by half between the ages of 65 and 85. The rate of decline was the same after controlling for characteristics such as education, gender, and wealth. They found older Americans were more likely to have life insurance than younger Americans but were significantly less likely to answer basic life insurance questions correctly.
In a separate analysis, Finke, Huston, and Howe found scores on problemsolving and memory can explain the agerelated decline in financial literacy, which involves both the ability to remember financial terms and concepts and the ability to process this information.
Finke says the similar rate of decline in those skills suggests that reduced financial decision-making ability might be a natural part of reaching advanced age.