Plan ahead to avoid financial, health care mistakes later in life

Older Americans risk making financial and health care mistakes as they age, even as growing numbers are living longer, healthier lives.

That means planning ahead is more important than ever.

“Estate planning is not just tax planning or bequest planning,” Harvard University professor David Laibson wrote in his paper “The Age of Reason.” “Planning for cognitive decline is just as important.”

Life expectancy today is about 79 years, up from about 68 years in 1950. Older Americans are also better educated and healthier than they were historically. More are delaying retirement and pursuing a portfolio of passions and purpose later in life.

Still, for most people, faculties eventually deteriorate with age. That brings risks when it comes to making financial and health decisions.

In a study published in March, researchers tracked more than a thousand men and women with an average age of 81 and no initial signs of dementia. The participants took a financial and health literacy test — which included questions ranging from financial terms and concepts to Medicare and prescription drugs — each year for an average of six years.

Participants’ average financial and health literacy scores dropped about one percentage point annually, the study found. Only 13% of participants maintained their financial and health literacy abilities throughout the study period.

The bottom line: Older adults are at risk of making financial and health care mistakes, including in routine decision-making that comes with aging. Researchers gave the examples of deciding when to claim Social Security or whether to take a lump sum or annuity payments from pension plans.

The concern is that declining financial and health literacy makes older adults “vulnerable to mistakes that significantly impact their well-being,” wrote study authors Patricia Boyle, Olivia Mitchell, Gary Mottola and Lei Yu.

The study fits into a wider literature that offers a powerful case for older people to get their estate in order while mentally capable of coping with major life decisions.

In practical terms, estate planning matters, including writing a will and establishing durable power of attorney and health care proxy. Building a trusted circle that can step in if and when capacities start diminishing is also important. The personal finance mantra “keep finances simple” is a useful framework.

Early planning pays off, especially for our loved ones.

Chris Farrell is senior economics contributor for “Marketplace” and a commentator for Minnesota Public Radio.