By the time they have reached retirement age, most investors who have significant assets have made wills, set up trusts, and acted responsibly to make sure that after their deaths their money goes where they want it to go. Most have also drawn up Powers of Attorney, which give someone they choose the ability to manage their affairs if they are incapacitated by illness or dementia and no longer able to manage them on their own. They also discuss with their spouse or heirs how they would suggest these beneficiaries invest their money once they have passed on.
Having done this, these retirees relax, convinced they have taken care of all the unpleasant situations we all prefer not to think about, and can safely go back to not thinking about them.
But this kind of planning does not take care of the biggest threat to the assets of these self-directed investors: the very poor decisions they are likely to make with their investments should they become one of the one in seven people who will begin to experience the earliest phases of dementia in their late sixties or subsequent decades.
Dementia Can Be Very Hard to Detect
Unless you have seen a loved one go through this process, you are probably unaware of how insidious it can be, and, most importantly for your assets, how long a person who is in these early phases of mental deterioration can keep their loved ones from realizing just how poorly they are functioning and continue to manage their money while making increasingly poor decisions as their brains erode.
The most typical pattern with many forms of dementia is that loved ones only realize there is a problem after the big checks have been written to scammers, the good investments sold at bad prices, or the abusive annuities and whole life policies purchased.
People are able to make these disastrous investing decisions in the earliest stages of dementia because their loved ones, who assume dementia announces itself with forgetfulness, don't realize there are quite a few syndromes that develop into dementia whose first symptoms are not forgetfulness, but are instead loss of judgment, impulse control, and emotional balance.
Dementia Is Not One Condition But Many With Different Patterns of Onset
That is because there are many different conditions that produce dementia which afflict the elderly. They include the classic form of Alzheimer's, where the earliest symptoms are the loss of memory and verbal abilities. But the elderly also develop vascular dementia, where they experience a series of micro strokes that slowly diminish their faculties. And when this happens, the symptoms depend heavily on which parts of the brain are affected by the strokes.
Other conditions that cause differing forms of cognitive deterioration including Parkinson's Disease, Lewy Body Dementia, and Frontotemporal Dementia. In some of these conditions, the emotions deteriorate before other cognitive abilities fade, leaving the person prone to excessive fear or rage. In others, risk-taking behavior accelerates. People with these conditions may lose their fear of strangers and their ability to discriminate between friends and exploiters, making them very easy to con.
Similar changes in mood, cognition, and behavior can also be caused by pharmaceutical drugs commonly prescribed to the elderly, sometimes in combinations that can be toxic to the elderly brain.
When memory loss is evident, relatives are quick to suspect dementia. If you get lost driving home, your loved ones likely to take a look at how you are managing your finances and if they see problems, intervene. People who have these forms of dementia are themselves more likely to be aware that something is wrong, early on, too, and ask for help.
If you are repeatedly forgetting how to find your investment accounts on your computer and forgetting which bank you put your money in, as terrible as your condition may be, it is less threatening to your portfolio than when you have other, more subtle forms of deterioration. Because when these more subtle forms occur, people are much less likely to be aware that they have become impaired, and are much more resistant to having others take over managing their affairs.
Loss of Impulse Control, Mood, and Judgment, Not Memory, Pose the Biggest Threats to Your Portfolio
In these more subtle forms of dementia, the first symptoms are not memory loss. Instead they involve loss of impulse control, emotional balance, or judgment. When dementia presents in this fashion, and you start exhibiting more signs of rage or anxiety than normal, your loved ones will tend to assume you are just getting crotchety, as is to be expected with the elderly.
But when that anxiety leads you to sell all your stocks one morning because you read a MarketWatch scare headline that terrified you, the damage to your retirement can be irreversible. Likewise, if the emotion that goes out of control as your frontal cortex deteriorates is greed, you may sell all your dividend stocks and put them into the tech IPOs or penny stock biotech, because some pumper posting online has told you it is a sure ten-bagger that will make you rich.
While doctors can usually pick up that a patient is suffering from classic Alzheimer's with a few simple screening tests, they are slow to diagnose dementia in older people based only on more subtle changes in their mood, emotions, or even behavior.
Relatives may be helpless to call a doctor's attention to these problems as HIPAA forbids doctors to even discuss a person's health with a concerned relative or friend unless the patient has specifically authorized them to do so in writing.
Relatives may not even know there is a problem when the person with very early dementia is an experienced investor who manages their own portfolio. While they may notice there is a problem when grandpa, who never gambled, starts going to the casino every week, when grandpa starts gambling with naked options bought on margin, the only evidence is buried in his account statements, which are available online only to those who are able to log into grandpa's account.
So this is why it is when people are in these very early phases of dementia that the worst kinds of financial elder abuse occur. This is when elderly retired professors likely wire all the money in their savings accounts to Nigeria. It is then that elderly widows fall in love with handsome young strangers they meet on cruise ships and turn their assets over to them to invest. There is an entire industry made up of boiler shop weasels who do nothing but telemarket the elderly all day hoping to find one in this state on whom they can unload penny stocks and sleazy annuities.
It Can Happen Here
Readers who are currently managing their assets very well will nod their heads, all the while thinking, "This can't happen to me." But the sad fact is that it can. Because the hallmark of this kind of dementia is that it can happen to anyone and when it does, it comes on so insidiously that, unlike classic Alzheimer's, the person affected has no idea that it has affected them. NIH research has found that one in seven Americans over age 71 is affected by some form of dementia. Various studies suggest that the incidence rises with each subsequent decade of age.
If you are affected by the earliest stages of dementia, it will be very hard for you to realize anything is wrong, even if you have made plans about handing over control of your investments should you become impaired. You might start buying and selling more impulsively without noticing it. You may lose your ability to analyze stocks using the techniques that you used to build up your portfolio and rely increasingly on what TV pundits or writers on sites like this tell you are "can't fail" opportunities. While markets are rising, the damage might be slight. But your ability to weather a bear market may decline, and worst case, you will end up like the many retirees who sold everything in 2008 and never reentered the market.
So, to protect your assets as you age from what you might do as you begin to lose your judgment or emotional control, you need to do more than choose someone to exercise your Power of Attorney, because that person can only step in when you have been declared incompetent.
What You Can Do Now To Keep Your Investments Safe Later
The first and most important thing is to make sure that your loved ones understand how dangerous the early, hard to detect changes caused by dementia can be. Make them aware that what may seem like small behavioral changes they see in you may be more significant than they appear and that the time to act is before you have made some unrecoverable error of judgment.
Make Your Doctor an Ally
Sign the forms available at your physician's office that give your loved ones the ability to talk to your doctors about your mental state, if they see behaviors that trouble them so that the doctor can help them determine if you may be posing a risk to yourself. If there is any doubt, get a referral to a gerontologist, a doctor who specializes in the treatment of the elderly.
Periodically ask your loved ones if they detect differences in your emotions, judgment, or behavior, which might mean that you are making questionable decisions. If they admit that they do, take immediate steps to bring in another individual to keep an eye on your investments.
Instruct your loved ones that if your emotional control goes and you get angry in inappropriate ways when told you are mismanaging your investments, they should contact your physician and begin the process of bringing in someone else to check that you are still capable of managing your assets.
To facilitate this process give your doctor now, while you are obviously mentally capable, a notarized statement describing the kinds of circumstances under which you would want the doctor to declare you incapable of managing your finances. Also give a copy of this statement to your POA.
Make it clear that significant signs of poor judgment or loss of emotional control, not just memory loss, should be grounds for such a declaration. Without such a declaration from your physician, your POA cannot take over the managing of your finances no matter how much you may need it. And without such a statement from you, doctors may err on the side of caution and declare you mentally capable as long as you know what day it is and can repeat a list of words a few minutes after hearing them.
Bring Your POA into Your Investment Process Now While You Are Functioning Well
Another important thing to do is to give the person you have appointed as your Power of Attorney the ability to see how you are investing, so they can intervene before you make severe mistakes. Give them the ability to access and review your investment records. If you are not comfortable having them access your accounts, at least ask them to review your transactions periodically to make sure that you aren't departing from your usual investment style. Let this person periodically look over your bank and credit card statements, too, looking for unusual spending patterns.
If you aren't comfortable giving them this access now, when you can explain the decisions you make and how you are using your money, you might consider finding another person to act as your POA. If you don't trust them with your accounts now, when you are there to oversee things, how can you trust them to manage your money for you should you become incapacitated?
By working jointly with your POA now, you will get a much better idea of whether they are the right person to manage your affairs should the need arise. They, in turn, will get a much better understanding of why you are invested the way you are and how to manage your investments in harmony with the principles you embrace.
You should also discuss with your POA any major gifts you plan to make to charities. A lot of seemingly legitimate charities, including religious groups, hospitals, and universities, target well-off older people with high-pressure sales tactics, wining and dining them and offering to name things after them in return for large donations. To avoid being exploited by charities as you age, write out a list now of which institutions you plan to contribute to and in what amounts, and give this document to the person you have chosen as your POA so they can refer to it in the future and keep you from being swayed by marketers who appeal to your vanity as your emotions and judgment begin to weaken.
Another approach that may be helpful to some investors, rather than relying entirely on their appointed power of attorney, is to develop a "buddy system" with another retiree or two who invest using a style similar to their own. Keep each other up-to-date with portfolio changes, and ask that if your buddy observes behavior that sets off warning signals, they inform your family that it might be time to call for help.
Consider Paying a Professional
If the person you have appointed as your POA turns out not to be able to understand your current investments, this is a good sign that you are investing in a way that could be very perilous to your retirement savings should anything happen to you. Since you may live for a decade or more in a condition where your POA would have to manage your resources, and since managing them well means the difference between living in an upscale assisted living facility and a hellhole nursing home, it is essential that if your POA can't understand and manage your current investment strategy on their own, you either find one who can, simplify your investments to where your current POA can manage them, or turn your assets over to a well-recommended professional fee-paid investment advisor.
If your POA is your spouse, you might want to reconsider this choice if they are near your age because the risk of developing subtle mental changes also applies to them. Some studies suggest that dementia is actually more prevalent among older women than it is in men, possibly because less healthy men are less prone to survive to older ages so older men who do survive are more healthy.
If you can't find a relative who has the understanding, education and integrity needed to manage your investments, you may have to enlist the services of a carefully screened, fee-paid financial advisor. This will involve trade-offs, as advisors will invest their way, not yours. But even the worst advisor is more likely to preserve your wealth better than an ignorant relative or a spouse who is also becoming demented.
And if you need to find such an advisor, the time to do it is now, when your brain is working well. Intellectual incapacity can strike very suddenly, and you should not expect a POA who is overwhelmed with the responsibility of handling your affairs to be able to find someone capable of managing your affairs when they are in the middle of a crisis involving hospital visits or moving you to a rehabilitation facility or into assisted living.
When you interview advisors, ask probing questions to see how well they listen and how willing they are to invest your money the way you want it invested. Ask who takes over if they retire or leave. If you can't find an advisor you trust, or balk at paying their hefty fees, an inexpensive, partially automated advisory service like the Vanguard Personal Advisor Service might be a safe choice. If Vanguard's index funds are good enough for Warren Buffett to recommend to his own wife, they probably will work for you. The fee-paid Vanguard service supposedly will also optimize your investment allocation to take into account your tax situation.
If you don't have family or don't trust your family with your financial affairs, it is essential that you find someone now who can take on this role. Perhaps a trusted accountant or attorney would be the appropriate person to turn to. Yes, it will cost money, but not nearly as much as you can lose if you don't take steps to protect yourself from what happens should you unknowingly experience the early stages of dementia.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.