Over 60? Research Says Your Money Confidence Is High but Investing Aptitude Is Not

I recently came across an interesting recently entitled “Old Age and the Decline in Financial Literacy.” 

It was authored by a couple professors from Texas Tech and one from University of Missouri. It was published in October 2015.

Basically, the study provides empirical proof that knowledge of basic financial concepts, including investing, declines appreciably after age 60. 

Quantitatively, it shows that financial literacy declines about 2% each year after age 60. Interestingly, it also shows that elderly people’s confidence level in their financial decision making doesn’t similarly decline with age. 

See the chart below to see an overall summary of their research.

Much research has been done in this area that attempts to explain this steady decline of financial aptitude.

Gradual mild cognitive impairment, declining mathematical skills, or deteriorating spatial reasoning have all been linked to it. Regardless of the cause, the evidence is fairly strong that it does indeed occur approximately after the age of 60.

Lethal combination

Financial literacy can be defined as the ability to understand fundamental financial concepts needed to make effective decisions.

For example, understanding the concept of a deductible in an insurance policy, or comprehending the basic characteristics of a mutual fund and how it differs from a common stock.

What is very interesting in this study, as seen in the chart above, is that overall confidence of this population set does not really decline past the age of 60, creating a potentially lethal combination of declining financial aptitude with an unchanged confidence.

They go into separating the concept of “financial literacy” into more finite categories, showing the decline in mental aptitude within each of these. (See the chart below.) It is noteworthy that financial literacy for the category of “investing” is the lowest and really declines the most as these respondents age beyond 60.

The researchers go on to stipulate that increasing confidence in conjunction with reduced cognitive abilities can, in large part, explain the poor overall investment decisions people often make in their later years. 

Given that financial advisors are probably in discussions with people either within this age range or rapidly approaching it, the empirical work presented here is indeed something to keep in mind.

It points to the argument that many people in their elder years or entering their elder years may need the professional services of a financial advisor or a registered investment advisor as stewards of their capital for the remainder of their lives.

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Gary has more than 30 years of industry experience, which includes research analysis and portfolio management for both retail and institutional accounts. He worked as a Senior Vice President at Wells Fargo Advisors and Wells Fargo Investment Institute for approximately 14 years in total, where he was a senior portfolio manager for both equity and asset allocation portfolios. He was also involved in investment manager due diligence and selection for the firm’s multi-manager portfolio models. Prior to joining Wells Fargo, Gary held senior-level investment management positions with several registered investment advisory organizations. He has been a Chartered Financial Analyst (CFA®) charter-holder since 1989. The CFA is a professional credential earned by investment management professionals after successfully passing three years of rigorous examinations and recording several years as a practising professional within the industry. Gary received his Bachelor of Science in Engineering from Purdue University and his M.B.A. in Finance from The University of Missouri. Additionally, Gary holds his FINRA SIE, Series 7 and Series 66 securities registrations as well as his Missouri Life Accident & Health insurance license. He is a member of the CFA Society of St. Louis and the Financial Executives Networking Group. He resides in Kirkwood, MO with his wife Kathy, and they have three adult age children, Aly, Ryan and Josh.