5 Reasons Retirees Make Better Financial Decisions

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By Tom Sightings

Do you get smarter as you get older, or does time slowly erode your cognitive abilities? A recent study from the University of California at Riverside and Columbia University, with the mind-bending title "Complementary Cognitive Capabilities, Economic Decision Making and Aging," has the answer.

Researchers tested a group of 20-somethings and people in their 60s and 70s in various financial subjects such as basic financial literacy, knowledge about debt, tolerance for risk and how much the participants thought about their financial futures. Despite a general loss of mental acuity, the older group did better than the younger test-takers in virtually every category. How is that?

The researchers explained the results by teasing apart two different kinds of intelligence. Fluid intelligence involves short-term memory, problem solving and the ability to manipulate information and process it quickly. Crystallized intelligence consists of a "stable repository of knowledge acquired through experiences, culture and education."

As we age, we lose fluid intelligence, but gain crystallized intelligence. %VIRTUAL-article-sponsoredlinks%"For decisions that rely heavily on processing new information, it is likely that the negative effects of aging will outweigh its positive effects relatively early in middle age," the study concludes. "On the other hand, if the decision relies on recognizing previously learned patterns in a stable environment, age may be an advantage."

It turns out that for most financial decisions it's better to rely on knowledge, experience and "previously learned patterns" than it is to exhibit an ability to quickly process new information. There are five areas, in particular, where older people outshine their younger counterparts:
  1. Retirees demonstrate a better understanding of finance and debt. Perhaps older people can't solve an equation quite as fast as their sons and daughters. But a greater knowledge about assets, loans and interest rates leads older people to make better decisions in the real world. They are more likely to save and invest in the first place, then make better financial decisions such as choosing mutual funds with low fees. They also avoid high-cost borrowing, such as taking out payday loans or carrying credit card balances, and they are wary of incurring other financial costs, such as high bank fees.
  2. Older people have more control over their emotions. They are less likely to buy at the top, then panic and sell at the bottom. They are more skeptical about jumping on the latest investment trend or buying on a hot tip, which is almost always a mistake. Older people are less likely to get sucked into a financial bubble that is about to burst. Who suffered the most during the housing bubble of the late 2000s? Not retirees, but first-time buyers.
  3. They are better at avoiding irrelevant information. Most older investors have the ability to tune out the noise from CNBC and other financial media, which focuses too much attention on the news of the day, especially when the news is not even that relevant to your investments. The latest pronouncement from the Fed or impasse in Washington can get everyone excited, but older investors know that while today is stormy, the sun may come out tomorrow or vice versa.
  4. Older investors have a sense of their own limitations. Young people can be cocky, overconfident and convinced they are always right. Their older brethren have gone through some bitter experiences, and know that sometimes forecasts don't pan out. And there is no more important quality in a good investor than a bit of humility. Experienced investors know the frustration of hoping that a losing investment will somehow make a comeback, when all the evidence says it will not. They have the discipline to take a small loss now rather than wait around for a complete catastrophe.
  5. Seniors are more patient. They are more able to weather the ups and downs of the market, without panicking and changing their minds with every twist of the financial wind. Younger people who can process information more quickly may make better day traders, but day traders almost always lose money. People who are slowly building up wealth over time in a considered and strategic way know that the experience and accumulated knowledge of a seasoned investor will win out in the end.
Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement and other concerns of baby boomers who realize that somehow they have grown up.


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5 Reasons Retirees Make Better Financial Decisions

While the only sure things in life are death and taxes, it's worrying about the quality of life that can really be a buzzkill.

Roughly 70 percent of Americans over 65 will need some form long-term care at some point in their lives, according to a study by the U.S. Department of Health and Human Services.

Once you hit 65, you have a 35 percent chance of entering a nursing home. The odds that you'll have to stay there for five years? About 20 percent.

With statistics like these, it's no wonder that the idea of purchasing long-term care insurance keeps popping up. Unfortunately, if you don't purchase coverage when you're in your 50s, it may be too expensive to buy once you're in your late 60s or early 70s. And if you suffer from certain illnesses, the truth is that long-term care insurance coverage may not be available to you.

The first hurdle is getting past the hype so that you can evaluate whether you need coverage -- not everyone does. Here are seven commonly held myths about long-term care.

The fact is, the vast majority of Americans will need some sort of long-term care services as they age, particularly help with Activities of Daily Living (ADLs), including getting in and out of bed, walking, bathing, dressing, and eating.

Even if you're healthy, the aging process unfortunately includes a natural decline in eyesight, hearing, balance and mobility.

It's easy to confuse "long-term care planning" with long-term care insurance, but they're not the same. In fact, making that mistake could literally send you into bankruptcy in your senior years.

Long-term care planning means developing a personal strategy and making decisions now about how you want a range of things to be handled when you or a loved one needs long-term care services down the line.

Insurance is just one of many options people consider for covering the costs of long-term care. If you buy an insurance policy but don't plan appropriately, your care could be compromised. If you develop a plan but never buy the appropriate insurance coverage or execute an advanced care directive, living will, and powers of attorney for health care and financial matters, you could wind up leaving all of your care decisions to others without the means to pay for them.

I lost my father when he was just 49 years old. But his mother lived to be 98 and was fairly vibrant and lived alone until the last year of her life.

There's no telling when you'll need your fully-realized long-term care plan to kick in, so the sooner you plan the better off you'll be.

If you're over 50, the best time to plan is now. It will make you a more informed consumer of long-term care services and will help you stay in control of tough decisions.

Nothing could be farther from the truth. Medicare does not cover the custodial services that help with ADLs. It will cover rehabilitation, home health care and durable medical equipment as long as they're deemed "medically necessary."

Medicaid may pay for your long-term care, but you need to meet strict eligibility requirements, which differ by state and often involve extensive documentation of assets. And don't think you can simply transfer all of your funds to your heirs and then apply. There's a five year "look back" rule that will require you to document where all of your money has gone.

There may be some government help if you're a veteran suffering from a service-related disability. To check your eligibility, go to VA.gov for details.

Have you priced long-term care costs lately? They're pretty darned expensive, and even with long-term care insurance, you'll be responsible for paying for some or all of the care you need.

Go to http://longtermcare.gov/costs-how-to-pay/costs-of-care-in-your-state/ to estimate what your costs could be. Then, think about the different ways you'll be able to meet that cost, either through an insurance policy, annuity, reverse mortgage, savings, pension benefits, social security benefits, or other personal income.

If there's a shortfall, long-term care insurance benefits could kick in.

Have you tried to be a 24/7 caregiver? It's pretty hard work, even for a devoted family member who loves you. No one person can be there for you every hour of every day and provide all of the care you'll need.

As part of your long-term care strategy, look into caregiving services in your area, including in-home providers, elder daycare centers, elder shuttles, meals on wheels, and other low-cost services offered in your area.

Managing a rotation of 24/7 caregivers is itself nearly a full-time job. You'll want your unpaid family members to spend their energy helping you manage your way through your need for assistance rather than resenting your lack of planning.

Really? What does your home look like?

Stairs, narrow doors, steps in odd places, low bathtubs, showers without handholds are the kinds of architectural obstacles that won't work if you have limited mobility or failing eyesight. And living alone won't help if you slip and fall and no one checks on you regularly.

At some point in time, living in a community or facility may make sense, and as part of your long-term plan, you'll want to consider it sooner rather than later.

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