Touch wood! Choi! Don’t jinx it! Sound familiar?
Growing up in Malaysia, you might have heard those phrases – or some variations of them – from your parents or an older relative, especially when it comes to topics like illness or death. The rationale is “out of sight, out of mind”, if you don’t talk about it, it won’t happen.
But the same kind of mentality will not fly with money management. The reality is that we age; we slow down and eventually, we stop to get off the “bus”. That’s part of life, but if you are suitably prepared financially, you can carry on with life unburdened when the effects of aging catch up with you.
You’ve heard it before, that it is crucial to have your financial plan in place from as early as possible, but there is an additional element to doing so. This includes having your retirement plan for any likely scenarios well thought out and planned.
You might not know it, but research shows that our financial competence – meaning the ability to manage our money to achieve our desired goals and values – is one of the first skills to deteriorate as we age and our cognitive abilities naturally decline.
This does not just refer to cases related to mild cognitive impairment (which doesn’t interfere with our everyday activities), Alzheimer’s Disease or dementia, but the natural aging process where one’s mental abilities decline.
The downward curve
Generally, our financial decision-making ability peaks in our early to mid-50s. From there, our financial skills can begin to decline sharply. To make matters worse, as our financial literacy begins to decline, our self-assessment remains intact.
This means, you could be making a very bad investment decision – one you would have recognised from a mile away a few years ago – and yet feel perfectly happy with that decision. A recent survey done by the State Street Global Advisors (SSGA) further provides evidence of this being the case.
In another study, out of 377 participants with high levels of education and financial literacy and did not have any form of dementia, the results showed a significant drop in their financial literacy score while confidence in their financial knowledge was essentially unaffected. The participants were on average 83.2 years old 3 years after the initial assessment.
Though this sounds alarming, this doesn’t happen to everyone at the age of 60s or 70s. Researchers of these studies and surveys acknowledged that the mental decline of one’s financial decision-making ability occurs at different ages for different people. For some it can occur in their late 80s and above. Warren Buffet at age 86, for example, is still one of the most successful investors in the world.
This could also be exacerbated with the changing investment profile as one ages. Not everyone is eager to spend their money as some people in their later years begin to feel vulnerable and take less risk with their money.
However, while each person has a different risk appetite, can we afford to not pre-emptively plan and protect ourselves? Whatever age that mental decline in financial capability occur, the fact that is agreed on from the various reports is that they will eventually occur and that our perception regarding our financial acumen is disproportionate to our actual ability as we age.
The relative increase in overconfidence and declining financial capacity occurs even if we do not suffer from Alzheimer’s or dementia. In short, it makes us –aging investors – vulnerable to making unfavourable financial decisions due to our weakening skills while being unaware of the consequences.
Are aging Malaysians in trouble?
The bad news doesn’t stop there as there are other factors to consider. Looking at the reports on our native Malaysian environment, the situation is set to become intensely difficult for the average Malaysian.
Here are 5 environmental reasons Malaysians will struggle with sustaining their retirement and senior living.
|As of 2015, 68% of EPF members aged 54 had savings less than RM50,000 and most had exhausted their savings within 5 years.
|90% and 86% of rural households and urban households respectively had no savings.
|Only 18% of EPF members achieved the basic savings minimum according to age.
|Only 20% - 25% of Malaysians have knowledge about financial planning.
|The situation will further escalate by 2030 as 14% - 15% of the population will be aged 60 and older.
Resistance to dealing with mental decline
Additionally, the problem is made more difficult by human behaviour factors. As previously mentioned earlier, most individuals have a psychological resistance towards planning for mental decline.
Here are 8 reasons why.
Planning it right with open dialogue
The truth is, not talking about it won’t make it go away. It is important to seek help from financial advisors. It is a matter of urgency to discuss the potential risks of cognitive decline and develop a well-rounded financial plan that is suitable as counter-measures to mitigate those risks.
One way of doing that is by having an open discussion with your family about creating a living trust, which acts like a will while you are alive but are entering into your “care phase”. The trust sets money aside for your care, while your mental faculties are intact. In doing so, you protect yourself from possible financial disasters and fraud that could leave you destitute in times of need.
Once you have a living trust in place, you can then seek professional help from a Care Manager, to assist you in co-ordinating your care services in the event you enter a stage of mental decline. You won’t need to waste time and money personally going through several care providers before finding one that meets your needs, and the potential for financial abuse is also mitigated. It pays to have a Care Manager who is familiar with you and your circumstances, if anything out of the ordinary should happen they would know it.
In the end, the idea is to address the risks of mental decline early and before any symptoms begin to manifest. By doing so, those involved in your wellbeing can neutralise the risks before they occur. Your family members and financial advisor would also be appreciative of you helping them lessen the burden from the difficult situations that may arise.
In the US, the SSGA report states that investors want to be more fully informed of their options in dealing with mental decline, which is an opportunity for a behavioural shift. The question for Malaysians is, are we willing to do the same?