A Major Retirement Risk

I’ve mentioned this before, but this new paper makes it worth mentioning again. The biggest risk to your retirement isn’t inflation, low investment returns, geopolitical chaos, and other risks people talk about. For most people, the biggest risk is cognitive decline that leads to less-than-optimal decisions. Everyone’s decisionmaking ability declines with age. I’m not talking about dementia or Alzheimer’s disease, but a normal reduction in the ability to analyze information and make good decisions. Because most people don’t recognize this decline and won’t seek help from financial professionals, they put financial security at risk.

• There is in inclination for older people to reject evidence of declining skills, but if financial planners make clients aware of their declining cognitive and financial literacy abilities before retirement they may be more willing to choose simplified and satisfactory solutions.

• A retirement consumption puzzle has been observed as wealthy individuals do not decumulate portfolio assets efficiently during retirement and therefore retirement income models may be overstating retirement living expenses.