5 Steps to Protect Your Finances from Cognitive Decline
Reginald A.T. Armstrong • Financial Wellness
Most people will experience some degree of cognitive decline or memory impairment as they age. It’s an unfortunate reality of life, but one that should be expected and planned for accordingly. As our brains age, cognitive impairment can interfere with our ability to make sound financial decisions and leave us vulnerable to elder financial abuse. So to safeguard your money from mistakes and fraud, it’s important to put a plan in place in advance.
While it’s common to have a durable medical power of attorney in place to handle healthcare decisions in the event of becoming incapacitated, it’s far less common for seniors to put a power of attorney in place for financial decisions. It’s best to anticipate that you may experience cognitive decline at some point and prepare for the possibility. Here’s how:
Step 1: Get your finances organized
Organizing your financial information is the first order of business. If someone is going to help you handle your financial affairs, you will need to start by taking inventory of what they need to know. Gather your important paperwork, make note of your accounts and passwords, and ensure everything is easily accessible, documented, and secure.
You’ll need to take stock of your assets, income, debt, and bills, and make a list that covers all of the details. If you have multiple banking and investment accounts and a wide range of assets, now is the time to begin simplifying as much as possible. It may be helpful to work with your financial advisor to consolidate accounts and eliminate unnecessary complexity.
Step 2: Select a trustworthy helper
Letting someone in on the details of your finances and handing over the keys can be scary, so it’s critical that you identify a trustworthy person to advocate on your behalf in the event that you can no longer do so for yourself. This person may need to take care of your bills, oversee your investments, handle day-to-day shopping and expenses, and be on the lookout for fraud attempts and scams. Ideally, it should be someone who has demonstrated that they are already good at managing their own finances.
An obvious choice may be your spouse, but if you are close in age, you may want to choose a younger person as an alternative, such as an adult child, younger sibling, relative, or trusted friend. Having more than one person looking out for various aspects of your finances can help to lessen the burden and provide an additional layer of protection.
Step 3: Lay the groundwork
A common mistake people make is assuming a person is able and willing to step in and help with finances. An adult child might be too consumed with managing their own household and career; and even if they want to help, they may be too busy to give your finances the attention needed. A friend or relative may not feel comfortable with the responsibility or their spouse may advise them not to get involved, fearing it could become a liability.
Start the conversation by letting the person know you trust them, that you are preparing for the future, and that you would appreciate their support. But do not be surprised if they are resistant or hesitant. It is a big responsibility and one that should not be entered into lightly.
If the person agrees, walk them through all of the details and make sure they are familiar with your desires. Put everything in writing, revisit your instructions regularly, and check in with them periodically to make sure they are still on board.
Step 4: Give official authorization
Putting everything in writing and handing over passwords are essential steps, but keep in mind that financial institutions and the companies you do business with will require legal authorization to allow another person to access your accounts.
To legally appoint an advocate to handle your financial matters, you will need a financial power of attorney (POA), also known as an attorney-in-fact or sometimes referred to as a general power of attorney. Typically, the document needs to be witnessed and notarized.
The authority outlined in this document can be as broad or specific as you want, and the appointed agent is legally obligated to make decisions that are consistent with your wishes. As you put a POA in place it’s important to list out exactly what powers to give to which person; keep in mind, you can have more than one POA. You should also know your state’s rules. For example, in some states, financial powers of attorney are durable, meaning the document is valid after the principal becomes incapacitated, and in some states, the agent will need to follow special processes to negotiate real estate on your behalf.
Step 5: Shift management when it’s time
Letting go of managing your money can be difficult emotionally, but remember that you are doing so to protect your own best interests. If you are diagnosed with dementia, the sooner you can shift responsibility the better. But if you are noticing a slight gradual decline, you can begin to gradually hand over the responsibility.
Be on the lookout for subtle signs of cognitive decline, such as forgetting to pay bills or becoming easily frustrated when handling routine financial tasks. If your children or a trusted family member points out that they are noticing some impairment, be open to this feedback and accept that it may be time to step away from managing your own financial matters. Better yet, be proactive and let them know what to watch out for in advance.
Preparation for prevention
Preparing your finances against cognitive impairment can protect your hard-earned money, prevent financial problems, and set your mind at ease. As depressing as it may be to face mortality and plan for your own eventual decline, look on the bright side—growing old is something not everyone gets to experience. Having the opportunity to plan now will make things easier down the road, and you’ll have one less thing to worry about as time progresses.