Is Cognitive Impairment Part of Your Retirement Income Plan?

Is Cognitive Impairment Part of Your Retirement Income Plan?

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The basic purpose of a retirement income plan is to develop tax-efficient strategies that are designed to provide predictable income streams to meet an individual’s or family’s financial needs during different stages of retirement.

A comprehensive plan should also include provisions for addressing potential life-changing experiences. One such event that’s generally associated with the latter stage of retirement is cognitive impairment.

As pointed out in the Center for Retirement Research of Boston College’s (CRR) January article, Cognitive Aging and the Capacity to Manage Money, most people who experience normal cognitive aging can manage their money in their 70s and 80s. This includes bill paying and evaluating an investment’s potential return relative to risk. Per the article, there are two situations that are problematic:  (1) financial novices and (2) individuals with cognitive impairment.

Financial Novices

While those with financial knowledge are generally able to manage their money in their later years, it’s much more challenging for individuals who haven’t acquired the requisite knowledge and experience needed to perform this task. These financial novices, who are often women, tend to be surviving spouses or individuals whose spouse has become incapacitated.

People who take on this role will either need informal help from a family member or formal assistance depending upon their depth of financial knowledge. The good news, according to the CRR study, is that most financial novices who aren’t cognitively challenged “will eventually gain enough knowledge to handle most financial matters without help.”

Individuals with Cognitive Impairment

Individuals in their 70s and 80s can often develop mild cognitive impairment (MCI) and ultimately severe dementia which is common in one’s 80s and 90s. According to a recent study cited in the CRR article, 95 percent of participants without any cognitive impairment were capable of managing their finances. This dropped to 82 percent of adults with MCI and 20 percent of adults with dementia.

Interestingly, individuals with cognitive impairment are often unaware that they’re not in control of their faculties, including their ability to manage their finances. Per the CRR article, “several studies have shown that people with MCI to full-blown dementia continue to feel confident about handling financial matters.” Given the fact that many of these individuals rely on a caregiver, this subjects them to the risk of financial abuse by the caregiver.

Simplify Investment Management

Although it can be challenging, surviving spouses and spouses of incapacitated individuals who don’t have the knowledge and experience of managing finances can eventually acquire the requisite information and skills to do so. It’s a much different story, however, for those with MCI and dementia.

Financial tools that are often used for retirement income planning include immediate and deferred fixed income annuities.  Both can fulfill the basic purpose of a retirement income plan as stated at the beginning of this article:  develop tax-efficient strategies that are designed to provide predictable income streams to meet an individual’s or family’s financial needs during different stages of retirement.

Immediate and deferred fixed income annuities can also eliminate the financial management challenges associated with cognitive impairment. Unlike a diversified investment portfolio that requires ongoing management, there are generally no significant financial decisions that need to be made with a fixed income annuity during one’s lifetime once an income start date is selected.

The income start date will vary depending upon the type of fixed income annuity as follows:

  • Immediate annuity: Generally one month after date of purchase
  • Deferred income annuity: Contractually set at the time of purchase with some contracts offering flexible start dates within a specified range before and after the contractual start date
  • Fixed index annuity with income rider: Totally flexible with most contracts requiring a one-year waiting period after the contract date

Develop an Extended Care Plan

Extended care should be a focal point of a retirement income plan. Strategies will vary with each household, depending upon medical history, marital status, potential extended family involvement, and financial knowledge and experience.

As discussed in my October 10, 2016 MarketWatch RetireMentors article, Make Sure You Have a Long-Term Care Plan in Place Before It’s Too Late, an extended, or long-term care, plan addresses various physical and mental changes that occur as we age. It includes specific steps that will be performed by family members and other individuals to manage the various changes when they occur. An extended care plan doesn’t necessarily have to include long-term care insurance.

Plan for Cognitive Impairment

Given the possibility and increasing occurrence of MCI and dementia, it’s important that informal and formal planning for these cognitive impairments begins long before they are likely to occur. As a general rule, the earlier that planning is done, the more options will be available to implement solutions to manage cognitive challenges when they materialize.

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