My father was, in one sense lucky. At age 70, while still making sensible financial decisions, he had a major stroke. His death followed a few months later.
My mother was not so lucky as she slipped into dementia, but fortunately had a small scope. Her main purchases during that phase were coffee pots (she died with 10 unopened), nice coats from mid-range department stores, and agreeing repeatedly to the same subscriptions. Ultimately, little harm no foul.
In contrast, I fear that my main purchase during my cognitive decline might be Wheeler REIT (NASDAQ:WHLR). Surely, that 96% leverage with almost no capital spells enormous opportunity! Bye bye long-term support for my spouse and any legacy.
If you live long enough, you will become incompetent
Some of us will be lucky enough to have our full intellectual capacity until we become permanently incapable, like my father did. In contrast, many of us will lose much or all of that capacity beforehand.
The really scary part is this. Studies (and experience) show that we will not realize we are becoming incompetent.
Those of us who, like my mother, slip gradually into some sort of dementia or similar neurologic disorder will pass through a period when we are financially incompetent. Those around us know it, and we do not. Whatever financial goals we have will be seriously at risk, whether from our own foolishness or from being scammed.
I will be very curious to see how many readers show up for this article. It is no doubt much more comfortable to make like an ostrich and avoid the issue.
Figure 1. Is this your approach to your pending cognitive decline? Source.
Beginning a few years ago, I studied a wide variety of materials about approaches to retirement planning. This, with a lot of thought and modeling, has evolved into my current plans for retirement investing and income.
The issue that has long stumped me is the issue of how to prepare for one’s own cognitive decline.
Of course, having a child who was a capable investor and had the time might provide an alternative. But most of us don’t.
An emotionally challenging issue
Ultimately, the near-certainty of cognitive decline implies that you are likely to need, at some point, to hand off control of your money to someone else. How do you react emotionally to that, Seeking Alpha reader?
I have to hand control of my money to someone else! Hell no! Just as the idea of giving up car keys is hard for an old granny (and once was for my mother), the idea of dependency in this space is a highly emotional issue for independent investors.
Figure 2. This could be you, watching your money fly away after your judgement is gone. Adapted from Source.
If you discuss this issue with a typical financial advisor, their response seems simple: Give your money to me! I don’t know about you, but this raises all my hackles.
This characterization is not really fair to the advisors. For example, this article in 2016 by an advisor contained a lot of good advice and emphasized the importance of advisors who commit to a fiduciary standard. But the way I perceived it was “Give your money to me!”
Emotionally, this is such a hard idea to accept.
Not much help to be found
One can look for help on Seeking Alpha and elsewhere. Elsewhere what I have found is mostly basic, ultimately silly, and will not protect one from one’s own bad judgement.
Examples: Manage your passwords well. Use credit monitoring. Automate payments. Simplify your accounts. Good grief!
Some articles do mention that one should do standard estate planning (Trusts, Wills, Medical Directives, etc.). This is true and you should. But none of this will prevent you from eventually making major financial mistakes.
Cognitive decline was included as one of several issues in an article by the Seeking Alpha Editors earlier this year, but no substantive advice was offered.
There seem to be lots of articles on SA about treatments for cognitive decline (or impairment), but few about what you personally should do about it. Invest and hope they are quick does not seem to me like much of a strategy.
One recent article, by Judith Ward, offers one piece of advice that seems quite solid to me. Designate a Trusted Contact with all holders of your funds. She reports that, under relatively new rules,
The firm is authorized to share transaction information, specific securities, beneficiary designations, and the account owner’s contact information with [the Trusted Contact].
Designating a Trusted Contact seems great to me, but does not solve the main problem.
There is one article on Seeking Alpha, from 2018, that directly addressed cognitive decline. It offers a variety of useful information and general advice but does not face up to what I think of as the real issue. This is learning to give control of your money to someone else.
That article led me to an academic paper reporting that the results of past learning (“crystallized intelligence”) can often compensate for the decline in mental agility (“fluid intelligence”) with age. This says to learn as much as you can about investing as young as you can.
But these effects do not stave off the ultimate loss of financial capacity. This issue is discussed in detail here, with many references, in an article aimed at medical clinicians.
Quoting from the article,
… financial capacity issues arise frequently in the context of older adults with neurodegenerative diseases like Alzheimer's disease (AD), Parkinson's disease (PD), and frontotemporal dementia (FTD). … In fact, declines in financial skills are often the very first functional changes to be identified in incipient dementia.
When financial capacity issues go unresolved, patients are at risk for significant financial losses that can endanger their residential setting, long term care, and personal autonomy. Loss of financial capacity also makes patients vulnerable to exploitation and abuse by others, …
In these electronic times, it may be your devices that will betray you. This is from USA Today on Sept. 30:
Already, some physicians are adapting to this new digital reality. At Johns Hopkins Medicine, Dr. Halima Amjad, an assistant professor of medicine, now asks older patients if they use a computer or smartphone and are having trouble such as forgetting passwords or getting locked out of accounts.
“If there’s a notable change in how someone is using technology,” she said, “we would proceed with a more in-depth cognitive evaluation.”
Figure 3. If you are lucky, what you will forget first is the password for your brokerage account. Source.
A discussion with McLean
I am an admirer of Wade Pfau’s writing and research. I also admire the firm with which he is affiliated, McLean Asset Management. Wade raises the issue of cognitive decline rather compellingly at times.
Unfortunately, for me, most of Wade’s research focus has been on retirees who differ greatly from me. Wade’s main focus has been on variations on the work of Bengen, relevant to retirees who are terrified of running out of money at age 90 and unable to contemplate being flexible in their spending.
This is not me. I am happy to invest and spend at even odds and adjust going forward. At the same time, I fear what I might do as I lose my judgment.
Since I do admire Pfau’s writings and he is attentive to this issue I reached out to McLean and ended up on the phone with one of their junior staff. I explained that I wanted help with ideas for addressing future cognitive decline.
I am pleased to report that he did not just say “give us your money”. What he did communicate was that, one way or another, I was going to have to learn to trust someone.
I’ve been chewing on that one for quite a while.
Biting the bullet
Like many of us, I think of my funds as having two functions. One of them is to support my near-term decades of living. The other is to accumulate enough real returns that my income can stay ahead of inflation in the long run.
For some people, leaving a legacy is also an essential goal. On my part, I know that this is likely to happen but will not be forcing it.
In this article, I explored an explicit two-bucket approach, viewing the spending pot as something that could be exhausted if necessary, while the growth pot carries the long-term load.
One can hope to manage the spending pot so that the value of its principal grows in time. But many individuals may face a choice between draconian spending cuts and spending flexibility.
From my modeling, one can withdraw at a surprisingly high rate from a portfolio of Dividend Aristocrats or large-cap equity REITs with a high probability of seeing the principal grow substantially nonetheless. Beyond that, one may hope to do some classic value investing in the style of Benjamin Graham.
That said, it still makes sense to reserve some funds for very long-term appreciation. These funds can sensibly be placed in a variety of Funds (index, other mutual, ETFs, etc.) or in a diversified portfolio of stocks.
I came to realize that this is the one place where I can see handing control to someone else even now. Fundamentally, any competent financial manager should be able to do a solid job for me in this type of investing.
I resolved to place a quarter of my investable funds in someone else’s hands. Geez. Just typing that sentence makes me nervous.
For completeness, I should note that a combination of pensions, annuities, part-time work, and social security will provide half my desired retirement income. Viewing the value of these cash flows as part of my total net wealth, the fraction in question is around 12%.
Defining the process
It makes sense to me to proceed in several steps.
Define how I want the money managed. Decide on the manager. Embark on a few-year trial period. Implement constraints to protect me from myself.
There are several things I should check in assessing potential managers of the money.
Do they work to a fiduciary standard and is this required? An advantage of investment groups within trust departments is that it is legally required.
What are their internal processes? To what extent do they use a team to assure that no single manager goes cowboy? What internal auditing do they have?
One possible manager I’ve talked to described their investment choices as “GARPy”. That is, they tend to seek growth at a reasonable price. This sounds good to me.
Here is what I am now telling potential managers of the money:
I am seeking long-term growth, and understand that there will be volatility. My expectations are as follows.
- Diversify sensibly and broadly
- Rebalance, at an interval you choose
- Make no bond investments, other than money market
- Alternatives are neither required nor forbidden
- Excessive churning is not desired
I intend to look at the portfolio once per year only. At that time, I will review all transactions with respect to the above expectations.
Here are my expectations over five years, subject to the overall trend in the markets, regarding compound annual growth rate. Less than 5% would disappoint; more than 10% would raise concerns.
There are details related to several issues not worth focusing on here. I could leave these funds in my employer account or roll them somewhere. I will likely eventually want to roll them from the present IRA category into a Roth, to escape continuing or further RMDs etc.
I should mention that my aversion to fixed-income investments is real. At present interest rates, Treasury bonds are a high volatility investment class more suitable for day traders than as a store of value. As discussed here, even bond ladders are likely to experience a couple of bad decades.
Giving up control
I will also communicate is that this is phase A of a cognitive decline plan. I need a few years' experience to make sure the funds are being managed to my satisfaction before taking the next step.
During those years, I will develop a structure for a trust to hold the funds. I want a trigger I can pull to have them begin paying out income at a sustainable rate. Beyond that, I want to place limits on my own ability to withdraw the money.
My current thinking is to require two steps before I can withdraw funds from the trust. First, I would have to submit to cognitive testing. Second, one or more of my trusted contacts would have to approve the action.
This second step, of having a trusted contact approve such actions, is more important than you may realize. My mother, for example, knew what questions would be on the standard cognitive tests. She was able to pass them for some years after she was actually incompetent by studying intently just before my sister took her to be tested. I’ve heard of other similar cases. Sad to say, this too could be you.
There will be humor
The portfolio implication for you is that you need to get this issue onto your list of things to address. Give yourself a deadline and set electronic reminders. You don’t want to let it slide until your relatives find out that you did manage to lose most of your funds.
There is a bright side. If you look for humor in this process, you can find it. Likely, it will come to you.
In the course of making one appointment, I contacted the bank whose trust department already is intended to care for my spouse and my funds after I’m gone. They are a natural possibility for this new task.
I asked my relevant contact, a woman, where to come for our meeting. She replied, via iPhone: “third floor, Tryst Dept”.
Got to love those iPhones.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.