Older Australians at risk of making serious financial mistakes

The report, titled Financial decision making for and in old age, investigated the factors contributing to financial risks for older people, and how they can be avoided or reduced.

According to the report, a combination of poor financial literacy, cognitive decline and high-stakes expenses, such as retirement living or aged care, can direct people into making financial mistakes.

Rafal Chomik, Report Lead Author and CEPAR Senior Research Fellow at UNSW Business School, says that additional support is needed to ensure the best decisions can be made in retirement.

“Some of the most important financial decisions need to be made at a time when cognitive ability is at greater risk of decline,” Mr Chomik says.

“Financial literacy declines at older ages. Yet, confidence in one’s own financial capabilities continues to increase throughout retirement.

“The research featured in this report points to some solutions, which are also being investigated by policymakers, and offer a variety of lessons and insights about boosting financial knowledge and cognitive health for better deliberative thinking and adapting settings to biases so that impulsive, intuitive thinking gets us further.”

Low financial literacy a challenge

Low financial literacy is one impactful factor with the report stating that less than half of Australians have high financial literacy.

Indigenous Australians, women and people with lower socio-economic backgrounds tend to have the lowest financial literacy, with poor decision-making often worsening disadvantage.

Financial literacy tends to peak at ages 55-64, a point where retirement is on the radar but not necessarily a focus. It then declines as people age.

Low financial literacy leads to less long-term planning, more impulsive purchases and fewer savings, impacting opportunities to take on new investments.

This can impact on retirement living and residential aged care, or even access to costly medical supports.

Early exposure to unbiased financial advice and beneficial financial education at the time of decision making are two solutions to mitigating financial risks in retirement. You can learn more about funding your retirement in our ‘Retirement Finance’ information section.

Factoring in dementia

Cognitive decline, such as the onset of dementia, also impacts on decisions made during the ageing process.

Long-term planning and the appropriate delegation of decision-making will provide additional financial security, says Kaarin Anstey, Scientia Professor of Psychology and a CEPAR Co-Deputy Director at UNSW Science.

“About 5 percent to 20 percent of the population aged 60 and over is estimated to have mild cognitive impairment, characterised by problems with memory, language, thinking or judgement,” Ms Anstey says.

“It is not severe enough to disrupt daily life but is likely to affect complex financial decisions. And as the population gets older, the share of people with some cognitive impairment is expected to increase.

“Policymakers need to develop better strategies to address health and financial risks in late [to] middle age, before the onset of old age, and our evidence-based research can help.”

Structured, simplified solutions

Simplified financial options, clear information on available aged care supports and a streamlined supply of high-quality products and services are just some of the recommendations made by the report.

Hazel Bateman, Professor of Pension Economics and CEPAR Co-Deputy Director at UNSW Business School, says impulsive decisions can be replaced with “preferred outcomes” through a structured decision-making process.

“Having defaults in financial products can simplify and guide decisions, but they need careful design,” Ms Bateman says.

“Better regulation of information provision, financial literacy initiatives that take account of how older people learn, and protections against poor financial advice to vulnerable consumers are needed.”

Generally, the best way to ensure good, quality financial decision-making, is:

• Educating yourself with financial literacy knowledge
• Focusing on long-term planning for superannuation, retirement living, etc
• Planning out your spending and tracking finances
• Setting up financial supports prior to cognitive decline, such as appointing a power of attorney
• Receiving financial advice from a range of unbiased and professional sources
• Utilising modern technology, such as computers or smartphones, for education and planning

Ms Bateman believes additional research is required to understand what the most effective approaches to reducing financial risk for older people are.