Do Your Retirement Plans Account for Cognitive Decline?

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The following is excerpted from Wade Pfau’s book, How Much Can I Spend in Retirement?: A Guide to Investment-Based Retirement Income Strategies, which is available via the Amazon link on this page.

When it comes to financial planning, Vanguard’s “Alpha” and Morningstar’s “Gamma” quantify only a portion of the value an advisor can add in a client relationship.

For instance, neither study considered how to incorporate home equity into a retirement income plan. The naïve strategy is the conventional wisdom of using a reverse mortgage only as a last resort option in retirement. But if you read any of my pieces on reverse mortgages from earlier this year, you will understand why that is a bad idea.

In addition, these Vanguard and Morningstar studies are naturally somewhat limited in what they can examine quantitatively. There are many other ways financial advisors may add value that are harder to quantify, such as ensuring you make the right beneficiary designations within an estate plan, are properly insured, and are not missing important strategies to save on taxes. One significant mistake in any of these areas could unravel years of good planning.

Advisors serve as a type of insurance policy. They provide support to avoid normal life mistakes that come with a lack of experience.

Life consists of many economic milestones, like retirement, as well as spurious “opportunities,” like buying into a timeshare, and various potential mistakes driven by behavioral considerations. Working with someone who has seen these situations hundreds of times can be helpful to steer you in the right direction and avoid costly mistakes.

With retirement, it is important to consider how declining cognitive skills associated with aging will make it increasingly difficult to self-manage your investment and withdrawal decisions. For households where one person handles money matters, surviving household members will be especially vulnerable to mistakes when they outlive the family financial manager. Developing a strong relationship with a trusted financial planner can help with both of these matters.