We're late learning our financial ABCs and then in old age we forget what we've learned, says behavioral economist Lewis Mandell.
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Early in his career, Mandell preached that young people weren't mastering personal finance. As he approached retirement, he turned his studies and research to people his own age and older. The conclusion: Financial wisdom peaks in the 50s and then declines steeply, making seniors more vulnerable to bad decisions.
But we're not all doomed to be doddering idiots losing our nest eggs to greedy second spouses and kids, unscrupulous advisers and our own financial ineptness, Mandell says. We can take action now to protect ourselves in our dotage.
Mandell, professor emeritus of finance and managerial economics, and former dean of business at State University of New York at Buffalo, took inspiration from his own parents. "My parents retired and went through some of the worst times in the economy -- very high inflation and recessionary times," he says. "Without having a huge amount of income coming in, they kept saving more and more money. They weren't huge penny pinchers. I asked 'How is this possible?' I started writing a book about them."
He widened his approach beyond his own parents and in his new book, "What to Do When I Get Stupid," Mandell describes how and why you should take action now while you still have your financial wits about you to protect yourself from others and your own bad decisions as you age.
Q: How was it possible for your parents to save?
A: They own their own age-in-place home. They have no debt.
Q: Why is an age-in place home important?
A: If you have not prepared for your older age by having a master suite on the ground floor and no stairs to get in and out of your house, you're asking for trouble. People often have to go into nursing homes or assisted care because they couldn't get into their bedroom because it was upstairs. If your home is totally paid for, then what you really need to live on in retirement becomes minimized.
Q: What advice would you offer retirees regarding credit cards and debt?
A: In my new book, I stress the importance of safety for retired persons who wish to maintain their standard of living for the rest of their lives. Being debt-free, if possible, is an important component of safety.
However, in my three previous books on credit cards, I stress the difference between the transaction use of credit and the debt use of credit, which is important here. Pure transactors, who have the ability and willingness to pay off credit card balances each month, can safely use credit cards for their convenience value, particularly when traveling. I would caution retired temporary or permanent revolvers against the use of credit cards and encourage them to use debit cards instead to avoid finance charges as well as the inadvertent build-up of leverage that can work against them.
Q: What else contributed to your decision to write this book?
A: I had a good friend who asked me about getting an annuity. I said, 'That's a dumb idea. Why in the world would you want an annuity now? Didn't you sit in on my seminars?' Then my friend said, 'What happens when I get stupid?' I realized that maybe we should consider putting our finances on automatic so we can't screw up on our own financial situation for ourselves and our loved ones. I decided to lead off with very good research being done on diminishing financial cognition. Then, I focus on how do we deal with it while we're still cognitive.
Q: You say in your book that cognitive ability related to credit cards and borrowing peaks around age 53, but investment skills don't peak until age 70. Why the difference?
A: As I say in the book, the fact that investment skills tend to peak some 16 to 17 years later than borrowing skills is probably due to the differing ages at which we gain experience in borrowing and investing. When we're young and don't have that much money, we're forced to learn how to borrow in order to finance many of the things that we need, including education, cars and homes. When we're older, at or near retirement, we don't need to borrow so much but finally have some assets accumulated for our retirement. It is at this age that many of us begin to pay attention to the financial news, attend legitimate financial seminars, and really begin to learn something about our investments. Therefore, our borrowing skills start to build early in life, in our 20s and early 30s, while our investment skills tend to build much later, often in our 50s and beyond.
Q: What could happen to people as they continue to make financial decisions as their financial capabilities decline?
A: On the benign end: I forgot to deposit this check. It could be we've gotten notification of a class-action suit because of bad deeds of a company we've done business with and we haven't bothered to fill out the forms. On the less benign end, you may make a decision based on advertising where a few years ago you would have said, 'This is stupid.'
Q: Are most people willing to admit their financial abilities might decline?
A: Self-sabotage is something most people don't think about. They think, 'This could happen to other folks.' They've observed it with people they know. But the research shows that as you get older, not only do you become less competent to understand complex things -- you also become more convinced of your ability in this area.
Q: Back to the annuity: Did you change your mind and if so, why?
A: Not having really studied the matter, I thought that buying an annuity when market interest rates were low meant sacrificing a lifetime cash flow. When I actually crunched the numbers, I found that a doubling of interest rates from 1 percent to 2 percent would affect annual annuity payments by very little -- just 7.3 percent for a 70-year-old man investing $200,000.
Q: Why do people need annuities?
A: The greatest risk is living too long. That's why we all need annuities -- we all know people who live to be 100. But fewer than 1 percent of people have an annuity. Economists who study this call it 'the annuity puzzle.'
Q: What kind of annuity do you recommend and why?
A: Like most economists, I like an immediate (or deferred) single payment fixed annuity from a highly rated insurance company that will pay the greatest monthly amount per dollar invested. Variable annuities tend to have less certain returns and generally have higher fees and selling costs associated with them. What people regard as the disadvantage of single payment annuities, I regard as one of the biggest advantages -- the inability to cash it in. That's money you can never be cheated out of.
Q: What is the most important takeaway from your book?
A: The single most important thing you can do is delay taking your Social Security until you turn 70. Not only does Social Security give you an 8 percent return for every year you wait, that 8 percent is a real rate of return that's protected against inflation. No one else is giving you a real rate of 8 percent. The single best annuity is Social Security because it not only pays you as long as you're alive, but it also adjusts to the cost of living.
Q: What about the fear that Social Security will collapse?
A: I spend a lot of time talking with people who are connected with Social Security. Social Security is not going to go out with a bang. It's going to decline with a whimper. There are still so many ways to fix Social Security so it will still be around. The most likely fix is raising the age at which you get your full Social Security benefits. I feel the age will be extended. But people will be given sufficient warning.