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Nov 2, 2018

Cognitive Aging And Financial Planning

by Jason Heath

Jason HeathI am feeling very mortal these days, and not just because I am about to turn 40 and am having a tougher time keeping up with my three kids. Professionally and personally, I get frequent reminders that none of us will live forever. I am also witnessing firsthand what happens when clients and family members experience cognitive decline.

While the practical daily challenges of cognitive aging are important, and may require medical and professional support, it is also important to consider how cognitive capacity impacts financial decisions.

Ability To Work

I sometimes engage in retirement planning with clients who plan to work until they are 65 or later. Some of my clients who are still working, even into their 70s – by choice, not by necessity – seem to be some of the happiest seniors I know.

The problem with those who plan to, and especially who need to work past 65 is that it may not be possible. We all know someone who has been downsized, sometimes in their 50s, and had difficulty finding a comparable role in their job search. But sometimes, health plays a role.

You might think blue-collar workers are more susceptible to early unplanned retirement, given their higher risk of physical injuries, but all workers have a risk of cognitive impairment cutting short their careers as well. Workers in white-collar roles may be more at risk of early unplanned retirement if they work in positions that are more cognitively demanding.

The key for workers approaching retirement is that needing to retire later can be a risky retirement plan and needing to retire earlier may be the reality.

Capacity To Manage Money

I am caring for a loved one with a form of Frontotemporal Dementia called Primary Progressive Aphasia. As the disease progresses, it is interesting to observe the divergence between crystallized and fluid intelligence.

Crystalized intelligence is derived from intelligence accumulated over your lifetime. Abilities such as walking around your neighbourhood, signing your name, or pouring a bowl of Cheerios come from crystallized intelligence.

Fluid intelligence is required when new information needs to be processed. Finding your way around a new supermarket, reading a new investment statement, or cooking from a new recipe require fluid intelligence.

Declining fluid intelligence can make it difficult to make financial decisions. I have a client who recently sold a building that was providing rental income used to fund their retirement. They are in the early stages of Alzheimer’s disease. To this point, they have managed their own investments – a mix of blue-chip stocks at a discount brokerage.

They have largely left the investments alone the past few years, likely due to a decrease in even the crystallized intelligence of managing their investments. Processing new information, like what to do with the building proceeds, has been difficult. They interviewed investment professionals to consider third-party management, and that too proved somewhat challenging, requiring fluid intelligence and critical thinking.

The family has ultimately decided to hire a discretionary portfolio manager to manage their investments in a similar manner to their historically blue-chip Do-It-Yourself (DIY) portfolio. This will not require day to day decision making from someone whose cognitive impairment will continue to progress.

DIY Investors

Many DIY investors would cringe at the thought of paying someone to manage their investments. I can appreciate this. That said, I always challenge DIY investors as they age to think about what happens if they can no longer manage their portfolio. Whether it is disability or death, a surviving spouse or children may not be able to fill the role of novice portfolio manager.

Frankly, if you wait too long to come up with a plan, the fluid intelligence that is required to make new decisions may prevent you from critically considering alternatives.

DIY investors who do not use Exchange Traded Funds (ETFs) should at least consider their strategic use. A migration to a mix of ETFs and stocks can make portfolio management easier. Older DIY investors could, for example, consider U.S. ETFs for U.S. stock exposure and focus their stock selection on more familiar, less intensive Canadian stock choices. Or certain accounts could be migrated into ETFs, so that only some accounts are truly active ones.

As interest rates rise and demand for longevity insurance and retirement income products increases, I suspect we will see the annuity market in Canada become more robust. For some DIY investors, especially conservative ones, annuities may provide a non-professionally managed investment solution as it becomes more difficult to manage their portfolios on their own.

Discretionary Accounts

Discretionary investing means that day-to-day investment decisions are left to the discretion of an investment professional. At the retail level, even an investor who buys mutual funds is outsourcing discretion to the fund manager, and only the selection of the mutual fund itself is a decision made by the advisor or the investor.

Some investment advisors are discretionary portfolio managers and develop an Investment Policy Statement (IPS) to apply parameters to your specific investment goals and needs.

Some advisors are not portfolio managers but work for companies that offer discretionary or managed investment programs to investors, typically at lower costs than retail mutual fund offerings.

There are differing discretionary investment options, in terms of services, fees, approach, and so on. But they may make sense for certain investors at certain points in their financial lifecycle, particularly for elderly investors who may have more difficulty making financial decisions.

Portfolio managers also have a fiduciary responsibility to their clients to put their interests ahead of their own. The lack of fiduciary duty throughout the broader financial industry and the significant conflicts of interest that exist are reasons that aging seniors and those with aging family members need to be cautious about who they trust.

Until recently, discretionary investing was limited to either expensive retail mutual funds or lower cost, personalized solutions for those with portfolio values exceeding $500,000. Robo-advisors and online advisors have brought affordable discretionary investing to the masses. They may not be a fit for everyone, but they do certainly provide a low-cost, hands-off investing solution to aging seniors with even modest portfolios.

Estate Planning

An up-to-date will is obviously important. Hopefully, most Canadians have wills by retirement, and ideally, long before.

Estate planning tends to focus on death, but it is not uncommon for disability or cognitive impairment to precede death, and sometimes, many years prior to a will being used to settle an estate.

This means that although a will may be a necessary, inevitable estate planning document, its pertinence may be shorter than a power of attorney, personal directive, mandate, or similar document.

I have gone through a family situation recently with a relative whose power of attorney for property was signed incorrectly and therefore invalid. The ensuing process to obtain guardianship of their assets has been complicated, slow and expensive.

In another client situation, a child has been tasked with trying to account for their father’s assets in Canada and another country, navigate domestic and foreign tax and legal obligations, and had a much more difficult time taking over their financial affairs than should have been the case with a bit of planning.

Proper estate planning should include the necessary paperwork to account for incapacity. But talking to loved ones about wishes long in advance and pre-planning accordingly is important.

I would not be surprised to see incapacity pre-planning become as popular as funeral pre-planning as the population ages.

Retirement Planning

On the topic of planning, it is important to consider the impact of cognitive aging on retirement funding.

Counting on high rates of return from an investment portfolio may be risky, since it becomes harder to make financial decisions as one ages, and this may cause risk tolerance and rates of return to decline in retirement.

Long-term care costs can also be expensive and difficult to plan for, and those with more modest anticipated expenses in retirement may be that much more at risk of an unexpected increase in spending.


Financial planning is multi-faceted and sometimes more art than science. The only thing that is constant in life is change. As we age, our cognitive abilities change naturally, and even I, at 40, am long past my cognitive peak in some capacities.

That is why it is important at any age to think ahead about how our financial needs will change as we age, who will help us, and provide not only the documentation but also the direction to those people to help us manage our finances.



Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.