The increasing prevalence of dementia in our ageing population will have dire ramifications on financial decision making, says a new report.
Findings from the Arc Centre of Excellence in Population Ageing Research (CEPAR) and Neuroscience Research Australia (NeuRA) show that Australia knows very little about the consequences of dementia on superannuation’s choice-based structure. The report argues that more needs to be done to assist older people to create effective strategies to manage this problem.
CEPAR Director Professor John Piggott has called for more investment into ageing research, to help support older Australians with employment and to make better financial decisions.
“Our retirement income system is very complex and requires a lot of active decisions. We are only beginning to think about how population ageing will affect the decision-making ability of older cohorts and what insights psychology and behavioural finance can bring,” said Prof Piggott.
CEPAR’s Cognitive ageing and decline: Insights from recent research report reveals that the direct cost of dementia is around $9 billion a year and set to rise to around $12 billion by 2025.
And it’s not just those with dementia who will have a problem in this field. Around eight per cent of Australians over 60 have some form of mild cognitive impairment, and although many will never develop dementia, it’s still enough to hamper good decisions about super and investments, and money in general.
Making financial decisions is difficult for Australians of all ages, claims CEPAR chief investigator at UNSW Business School Professor Hazel Bateman.
“Australians nearing retirement score higher in tests of financial literacy than younger people or those in other countries, but about half of them answer basic questions about inflation, interest rates and diversification incorrectly,” said Prof Hazel Bateman.
“As the population ages and more people face cognitive limitations, we need to consider whether the choice architecture of superannuation can cope.”
According to a YourLifeChoices report published last week: “Financial literacy is the ability to understand how money works, how someone makes, manages, invests and spends it wisely – or has the nous to employ a financial adviser and/or accountant to perform some of these tasks.”
The YourLifeChoices Retirement income and financial literacy survey 2018 revealed that of the 86 per cent of 5064 respondents who manage their own financial affairs, 63 per cent say they understand their finances and investments well or very well.
Granted, these respondents were not asked if they had any cognitive impairment, but the results show that older Australians may understand their finances a little better than CEPAR believes.
Still, CEPAR’s calls for improved default strategies, financial literacy programs and better safeguards against poor financial advice will go a long way to making the system more transparent and give retirees a better shot at a comfortable financial situation in retirement.
“The need to allow individuals their financial freedom while mitigating confusion and poor decision-making among this age group is something that has yet to be reconciled in the literature and in policy,” Prof Bateman concluded.
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