A new study concluded Americans' ability to manage their money may decrease after they reach retirement age.

But what may be even more troubling is that retired Americans who participated in the study didn't report a loss of confidence in their ability to make financial decisions.

The study, authored by the department of personal financial planning professors Michael Finke and Sandra Huston of Texas Tech University and John Howe of the University of Michigan, found financial literacy declines at a consistent rate after retirement.

The ability to answer basic financial questions decreases as retired people age, and this rate of decline almost exactly matches the gradual erosion of memory and problem-solving abilities later in life, according to the study.

This is worrisome, Finke said, because fewer employers provide pensions than ever before, leaving more people dependent entirely on their retirement savings.

“This was originally one of the most surprising and alarming findings from the study,” Finke said. “As we get older, our ability to answer basic financial questions that include knowledge and the ability to apply that knowledge, gets worse. But we have no idea this is happening. It's very similar to the research on driving skills. Since it happens so gradually, we're not aware our abilities are getting worse over time.”

In “Old Age and the Decline of Financial Literacy” published in the journal Management Science, the researchers found average financial literacy scores fell by half between the ages of 65 and 85. The rate of decline was the same after controlling for characteristics like education, gender and wealth.

In a separate analysis, Finke, Huston and Howe found scores on problem-solving and memory can explain the age-related decline in financial literacy, which involves both the ability to remember financial terms and concepts and the ability to process this information.

Finke said the similar rate of decline in these skills suggests that reducing financial decision-making ability may simply be a natural part of reaching advanced age.

Decreasing financial literacy opens the door to abuse from less principled advisers as well.

A recent study by business school professors at the University of Chicago and the University of Minnesota found financial firms who hire advisers with ethical violations are more concentrated in areas with high elderly populations.

Since older clients are also wealthier, they may meet net worth thresholds that allow advisers to sell them complex products that can only legally be bought by so-called accredited investors who are assumed to be more financially knowledgeable. Older consumers whose financial literacy skills have declined may be particularly vulnerable to the sale of unsuitable investments.

Credit unions across the nation have been taking steps to help identify and prevent elder financial abuse.

What's more, in February, CU Direct launched a product taking aim at the growing problem of identity theft and fraud among elderly credit union members, according to the Scottsdale, Ariz.-based Vero, which is a division of the CUSO.

Moreover, credit unions and other financial institutions may soon be able to put temporary holds on accounts belonging to some members they suspect are being financially exploited, according to proposed FINRA rules.

The rules would permit 15-day holds (and longer, in some cases) on accounts held by members who are either 65 and over or over 18, and whom an institution “reasonably believes” have mental or physical impairments that render them unable to protect their own interests.

Instant Insights /

Financial Literacy Declines for Retirees: Study

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