Financial Literacy Declines with Age, Confidence to Make Decisions Doesn’t

Newswise, March 14, 2016 — 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 this rate of decline almost exactly matches the gradual erosion of memory and problem-solving abilities later in life.

This is worrisome, Finke said, because households aged 60 years and older control more than half of the wealth in the United States. Since fewer employers provide pensions than ever before, more people are dependent entirely on their retirement savings.

What was even more concerning, however, is older respondents didn’t report a loss of confidence in their ability to make financial decisions.

“This was originally one of the most surprising and alarming findings from the study,” Finke said. “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 very 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 like education, gender and wealth. T

hey found older Americans were more likely to have life insurance than younger Americans but were significantly less likely to correctly answer basic life insurance questions.

In a separate analysis, Finke, Huston and Howe found scores on problem-solving and memory can explain the age-related decline in financial literacy, which involves both the ability to remember financial terms and concepts and the ability to process this information.

Finke said the similar rate of decline in these skills suggests that reducing financial decision-making ability may simply be a natural part of reaching advanced age.

Decreasing financial literacy opens the door to abuse from less principled advisers as well. A recent study by business school professors at the University of Chicago and the University of Minnesota found financial firms who hire advisers with ethical violations are more concentrated in areas with high elderly populations.

Since older clients are also wealthier, they may meet net worth thresholds that allow advisers to sell them complex products that can only legally be bought by so-called accredited investors who are assumed to be more financially knowledgeable. Older consumers whose financial literacy skills have declined may be particularly vulnerable to the sale of unsuitable investments.