DOES AGE MATTER IN FINANCIAL PLANNING?
Many people believe age is nothing but a number. Speaking of age, does it matter when it comes to financial planning?
A study entitled "The Age of Reason: Financial Decisions Over the Life-Cycle with Implications for Regulation" looked into the life cycle patterns of financial mishaps using a database measuring several types of credit behavior. Its findings revealed the following:
- An average person makes his best financial decision at the age of 53.
- Certain financial mistakes include suboptimal usage of credit card balance transfer offerings, excess interest rates and fee payments, and miscomputation of the value of an person’s house.
- Middle-aged adults commit lesser financial mistakes than younger and older people.
Our capacity to make solid financial decisions escalates sharply in our 20s and 30s, steadies and peaks in our 50s, and starts to dwindle sharply in our 70s and 80s. The learning curve connected to obtaining financial knowledge is considered the rationale for the rise in a person’s early years; descending cognitive function is said to be the reason behind the drop in the latter years.
Our cognitive capabilities are all very significant when deciding on complicated financial decisions. The same study said around half of the population between ages 80 and 89 has a dementia or cognitive impairment without dementia. Dwindling cognitive function, years of handling financial matters, and desire to concentrate on optimistic life experiences have led in a few fascinating behavioral traits normally noticed in older investors.
A Nature Neuroscience Journal study, "Anticipation of Monetary Gain but not Loss in Healthy Older Adults", stated older adults show a reduced responsiveness to expected financial loss in relation to younger ones. The subdued responsiveness may be credited to years of enduring the peaks and troughs of investing, as well as the desire to focus on positive experiences.
Other research indicates older people prefer not making complex decisions themselves and their problem-solving techniques are typically more avoidant than younger people, meaning an older adult tend to evade emotionally-anchored financial decisions such as estate planning, ditching a friend/financial advisor, or selling a concentrated investment holding. Aside from that, they may be more open to looking for professional advice than younger ones.
Younger adults display a minimal familiarity bias than older adults, perhaps because of declines in things such as cognitive control. This behavioral bias could render a false sense of security to older adults when contending with things deemed familiar. It can make them invest only in familiar companies or asset classes or more prone to financial scams.
Let’s face it: We cannot avoid aging. However, we can do something to minimize and improve its potential effect on our finances.
Dr. Jeffrey Toth, psychology professor at the University of North Carolina, said there are numerous ways to maintain and possibly refine our cognitive function, including mental stimulation, diet, physical exercise, and social interaction.
The co-author of the "Fluency, Familiarity, Aging, and the Illusion of Truth" research also suggested the avoidance of negative factors in keeping cognitive skills like vices, high-fat diet, and lack of sleep. All these have been proven to bolster cognitive decline. But if unavoidable, do it moderately.
Does age play a vital role in financial planning? Definitely. We shape our financial future based on our age, maturity, and financial situation. Aging is inevitable, but we can control its impact on our finances. Take it from comedian George Burns who once said a person cannot help getting older, but he does not need to get old.
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