Older Australians are at risk of making serious financial mistakes

The report, titled Financial Decision Making for and in Old Age, investigated the factors contributing to financial risks for older people and how they can be avoided or reduced.

According to the report, a combination of low financial literacy, cognitive decline, and high-stakes spending, such as retirement living or elder care, can cause people to make financial mistakes.

Rafal Chomik, lead author of the report and CEPAR senior fellow at the UNSW Business School, says additional support is needed to ensure the best decisions can be made in retirement.

“Some of the most important financial decisions need to be made at a time when cognitive abilities are most at risk of decline,” says Chomik.

“Financial literacy declines with age. Yet confidence in one’s own financial capabilities continues to increase throughout retirement.

“The research presented in this report points to some solutions, which are also being considered by policy makers, and offers a variety of lessons and insights into improving financial literacy and cognitive health for better deliberative thinking and learning. adaptation of the parameters to the prejudices so that the impulsive and intuitive thinking takes us further.

Low financial literacy is a challenge

Low financial literacy is an impact factor, with the report indicating that less than half of Australians have high financial literacy.

Indigenous Australians, women and people from lower socio-economic backgrounds tend to have the lowest financial literacy, with poor decision-making often compounding disadvantage.

Financial literacy tends to peak between ages 55 and 64, a point where retirement is on the radar but not necessarily a priority. It then decreases with age.

Low financial literacy leads to less long-term planning, more impulse buying and less saving, which impacts opportunities to undertake new investments.

This can impact retirement residences and residential elderly care, or even access to expensive medical supports.

Early exposure to unbiased financial advice and beneficial financial education at the time of decision-making are two solutions to mitigating financial risk in retirement. You can find out more about financing your retirement in our “Retirement financing” information section.

Consideration of dementia

Cognitive decline, such as the onset of dementia, also impacts decisions made during the aging process.

Long-term planning and appropriate delegation of decision-making will provide additional financial security, says Kaarin Anstey, Scientia Professor of Psychology and Co-Deputy Director of CEPAR at UNSW Science.

“It is estimated that around 5 to 20% of the population aged 60 and over suffer from mild cognitive impairment, characterized by problems with memory, language, thinking or judgement,” says Ms Anstey.

“It’s not serious enough to disrupt daily life, but it is likely to affect complex financial decisions. And as the population ages, the proportion of people with cognitive impairment is expected to increase.

“Policymakers need to develop better strategies to deal with health and financial risks at the end of [to] middle age, before the onset of old age, and our evidence-based research can help. »

Structured and simplified solutions

Simplified financial options, clear information on available eldercare supports and a streamlined offering of high-quality products and services are just some of the recommendations made by the report.

Hazel Bateman, professor of pension economics and deputy co-director of CEPAR at the UNSW Business School, says impulsive decisions can be replaced with “preferred outcomes” through a structured decision-making process.

“Having flaws in financial products can simplify and guide decisions, but they require careful design,” says Bateman.

“Better regulation of the provision of information, financial education initiatives that take into account how older people learn, and protections against poor financial advice to vulnerable consumers are needed.”

Generally, the best way to ensure quality financial decision-making is to:

  • Educate yourself with financial literacy knowledge
  • Focus on long-term planning for retirement pensions, retirement residences, etc.
  • Plan your expenses and track your finances
  • Introducing financial supports before cognitive decline, such as appointing a proxy
  • Receive financial advice from a variety of unbiased and professional sources
  • Use modern technology, such as computers or smartphones, for education and planning

Ms Bateman thinks more research is needed to understand which approaches are most effective in reducing financial risk for older people.