Monday, 18 January 2010

Getting Older: 5BX, the Brain and Retirement Finances

5BX is the exercise program developed by the Royal Canadian Air Force in the 1950s. I've done it (mostly) on and off for all my life since my teens up to now in my 50s. I can no longer do my all-time highest chart level 5 step B+ (I would really like to know if anyone ever managed the bottom level of chart 6, let alone A+). It's not even close. I'm now down to the top of chart 2, which in relative terms is still pretty darn good since it is the prescribed fitness level for someone ten years younger than I am. My 5BX life history is very useful as definitive benchmark of my physical capacity and tells me in no uncertain terms that I ain't quite what I used to be.

Alas, our brains are similar to the rest of our bodies. Regular exercise (thinking, arguing, reading, working on puzzles, writing) surely helps it stay in optimal shape but decline there is nevertheless. It affects our judgment about finances too. In How Older People Behave, chapter 8 in The Future of Life Cycle Saving and Investing: the Retirement Phase from the CFA Institute, David Laibson describes the decline of cognitive function as we age and the result he found in one study - that the older people were, the higher interest rate they paid on home equity loans. This is not dementia or Alzheimers at work, he says. It is the slow natural brain decline from age.

Dementia adds to the scale of the financial challenge and it will get much worse - in Canada, the Alzheimer Society has just published the scary Rising Tide of Dementia, which predicts the prevalence of dementia will more than double over the next 30 years if nothing is done.

The problem with brain decline is that, unlike our physical capacity, it is more hidden and harder for a person to be self-aware. How can you step back in time to assess your old brain of 20 years ago compared to today? In today's retirement world of increasing variety and complexity of financial products, combined with a shift away from defined benefit pensions to plans and savings where people have to make their own decisions and when they are living much longer to boot, retirees look more exposed to high fees on opaque products or pushy fast-talking salespeople, not to mention scams and frauds. The inter-generational transfer of wealth will occur in a manner somewhat different than the inheritance route.

What can be done to minimize the possible harm? Laibson suggests helping people make the right choices by setting defaults and automating investments. He also suggest creating inexpensive and scalable trust structures so that when retirees pass over control of their finances as they are on average progressively forced to do by age, it will be to someone trustworthy.

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