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Have you considered cognitive decline in your planning?


Deciding when to turn over financial control is crucial in planning for cognitive decline and can have significant implications for investors, according to a recently published Vanguard research paper, The risk of cognitive decline: Investors’ perception and preparation. The paper surveyed more than 2,000 investors, and the results show that investors tend to underestimate the risk of cognitive decline.1

“While most respondents had some planning in place, they were less likely to have had proactive conversations about care and the transfer of control of finances,” said Anna Madamba, a senior investment strategist in Vanguard Investment Strategy Group and the paper’s author. “Timing the transfer is key, as mistiming can have significant implications for financial well-being.”

The costs of a mistimed transfer

The paper describes cognitive decline as a continuum from mild impairment to a diagnosis of dementia. The average perceived risk of decline shown in the survey roughly captures the actual risk of experiencing the most extreme form—the lifetime risk of dementia— but misses the large fraction of those at risk for milder forms.

“Investors in our survey, particularly women, underestimated the risk of cognitive decline,” Ms. Madamba said. “This is significant because financial repercussions can hit before symptoms become evident.”

Investors were asked how much they had planned for cognitive decline. Creating a living will or designating power of attorney were the most commonly accomplished tasks, completed by at least seven in ten investors. A minority had named a person to check mail or pay bills, prearranged care (anticipating the next steps in living arrangements or caregiving), or prepared guidelines for the transfer of financial control.

Figure 1. Planning varies widely by activity

This chart shows the percentage of those surveyed who have planned for specific activities related to cognitive decline. Most had written a will, asked someone to assume power of attorney, and consolidated accounts. But only a minority of investors had a revocable trust, purchased long-term care insurance, purchased annuities, assigned someone to check mail and pay bills, or prearranged care. Only 4% of those surveyed said they had developed guidelines for the transfer of control of financial assets, the lowest percentage of any task surveyed.
Source: Vanguard, 2021.

“The incidences of having a person to check mail and pay bills, prearranging care, and developing guidelines for transfer of control tend to spike at age 85 or older,” Ms. Madamba said. “This suggests that planning for these activities may be more reactionary than proactive.”

One of the biggest decisions for investors with cognitive decline is when to transfer control of their finances to an agent. However, fewer investors reported preparing for this transfer than any other task in the survey. We followed up by asking them to identify the ideal time to transfer this control. More than eight in ten thought it would be after the onset of decline but prior to complete incapacity.

Figure 2. Many investors wait too long to transfer control of finances

More than nine in ten investors surveyed say they wouldn’t transfer control of their finances at the onset of cognitive decline. Instead, more than eight in ten say they would transfer further into decline but before complete incapacity, and nearly 10% wouldn’t make the transfer until after complete incapacity.
Source: Vanguard, 2021.

To measure the welfare costs of a mistimed transfer, the survey asked investors how much they would need to be compensated to make up for a delayed or earlier-than-ideal transfer. On average, the welfare cost of a mistimed transfer equaled 14% of net worth, or more than $300,000.

“The significant welfare costs highlight the importance of having plans in place that define the triggers to transfer control of finances to an agent, as well as the process to detect triggers and execute the transfer,” Ms. Madamba said.

Implications for investors, agents, and advisors

The results of the survey reveal several key takeaways for investors, agents, and financial professionals, including:

  • Investors should be aware that the risk is broader than they might think and that planning for cognitive decline, including periods of mild impairment, is necessary. Symptoms may not be noticeable but financial repercussions are real, and investors should consider ceding control of their finances earlier than they otherwise might.
  • When planning for cognitive decline, it’s important for investors to identify who will serve as an agent and take over their affairs in the event of incapacity. It is crucial for investors to communicate with their agents to make sure they are aware of their specific responsibilities and not just identify someone to serve in this capacity. One consideration in selecting an agent is proximity. Not all agents live nearby, and investors should consider identifying a local contact to help with day-to-day tasks and caregiving.
  • Investors should consider naming multigenerational agents. A sizable portion, particularly those without children, name someone from their own generation as their agent. But taking this approach increases the chances of selecting someone with a similar risk of experiencing cognitive decline.
  • Financial advisors can play multiple roles for clients preparing for cognitive decline. They can create a plan that incorporates consideration of cognitive decline. They also can coordinate with an agent, other specialists, and local resources. They can even serve as agents themselves.

“Incorporating the risk of cognitive decline into wealth and health planning requires collaboration among various parties,” Ms. Madamba said. “It involves not only having all the legal documents in place but also holding the appropriate conversations with family members, providers, and experts .”

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1The survey was conducted in 2020, and a total of 2,489 Vanguard investors, or 46% of those invited to participate, responded. Those surveyed were age 55 or older, with a median age of 74 and a median net worth of $1.6 million. The majority were married (or with a partner), had at least one living child, and were retired. Sixty-seven percent rated their health as either excellent or very good. Six in ten had been exposed to cognitive decline, reporting that someone close to them had suffered from it.

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