A few years ago, I received a call from a concerned client. He was the primary caregiver for his elderly uncle who was suffering from dementia. On a recent visit, he discovered that his uncle had purchased a new Harley Davidson motorcycle. His uncle was in no condition to drive a car, much less a motorcycle. My client was left wondering how this happened and what to do about it.
We find it hard to imagine that we will ever be in a position whereby we cannot manage our financial affairs and make appropriate financial decisions. Yet, research demonstrates that one’s ability to make sound financial decisions decreases as one ages. A research report by Michael Finke of Texas Tech University finds that our financial literacy declines after age 60, regardless of our education level.1 Other studies indicate that a decrease in cognitive abilities is not associated with a drop in confidence in financial decision making ability.2 So we make poor decisions without being aware that we are making poor decisions. This helps to explain why seniors are by far the largest group victimized by financial fraud.
The Financial Services Industry Regulatory Authority, Inc. (FINRA) has listed senior fraud as one of their priority areas for 2017. They recognize elder financial abuse as a major problem that is expected to get worse with the aging of our population. The shift from defined benefit plans (which are managed by professionals and paid as a monthly pension) to defined contribution plans (which are managed by the individual, typically in a 401(k) plan) has compounded the risk of financial fraud and exploitation. Due to this shift, the Baby Boomer generation has far greater control over their investment decisions than previous generations.
So what we can do to protect the elderly from making poor financial decisions or being a victim of financial fraud or exploitation? Here are some steps that might help.
Start early with a plan
While we are younger, it is a good idea to organize our finances. For example, at retirement, we can set up automatic deposits directly into our checking account from income sources such as Social Security and our investment accounts. Likewise, monthly payments can be set up for recurring bills, such as utilities and insurance payments. Remembering to write a check and mail the utility bill is easy for those younger, but might not be so easy for the elderly. Automation can help eliminate human error.
Involve your family
Americans do not feel comfortable talking about money. According to a survey by Wells Fargo, 44% of Americans rank personal finances as the most challenging topic to discuss with others.3 This societal taboo helps the fraudsters. Many adult children are clueless about their elderly parents’ financial situation. Seniors who become victims of fraud are often too ashamed to report it. Taking the step towards more openness can help protect you.
Protect your Identity
Many scams involve identity theft. I recently heard a story of an elderly woman who received a call from her “granddaughter” who urgently needed money. After wiring the money, the woman discovered that it was not her granddaughter on the phone. The criminals had combed through social media and learned enough personal information, including the granddaughter’s voice and favorite activities, to be able to successfully pose as the granddaughter. Schemes can be very sophisticated. Beware of posting too much personal information on social media. Protect your confidential information and never email sensitive information as it is not secure.
Draft a Power of Attorney
A power of attorney is a legal document that grants another person (your agent) the authority to make financial decisions on your behalf. This person will have broad power over your finances, so it is critical that you choose a trusted individual. Discuss ahead of time with your agent the conditions for when they should assume control.
Work with a trusted financial professional
A financial advisor is the first barrier between a client and the unauthorized access to their money. A good advisor knows their clients and will quickly see red flags, such as diminished capacity or unusual financial behavioral. Research from Allianz shows that seniors who regularly discuss finances with a third party feel better equipped to recognize and prevent financial abuse.4
Perhaps the scariest thing about aging is our loss of control. Taking these steps and planning ahead can help prevent poor financial decisions and protect against financial fraud or exploitation. It gives us back control.
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