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Robert Powell Archives | Email alerts
Oct. 27, 2011, 12:01 a.m. EDT
By Robert Powell, MarketWatch
BOSTON (MarketWatch) "â? It must be someone's idea of a joke. If so, it's a cruel one. Consider: We ask older Americans to make complicated financial decisions about Social Security, Medicare, retirement distributions and more "â? just when they are losing their fast ball.
Regardless of gender or education level, Americans become considerably less literate about all things money after age 60, according to a new study.
MarketWatch's Robert Powell hosts a panel discussion on the future of retirement, including financial risks, lifestyle choices and working in retirement, with benefit experts Joseph Coughlin, Kathryn McCabe Votava and Rick Miller.
The scores on a test measuring knowledge of investments, insurance, credit and money basics fell about 2% each year starting after age 60, falling from about 59% correct "â? hardly a passing grade "â? for those in their 60s to a dismal 30% for those 80 and older, according to Michael Finke, an associate professor at Texas Tech University and a co-author of the study.
Here's what's even worse: Our confidence in our financial decision-making abilities rises with age. We are not older and wiser. Rather, we are older, less smart and overconfident.
This notion of confidence rising while financial literacy is falling spells trouble for that group of Americans that now represents more than 12% of the population and controls half of all the financial wealth in America, according to Finke, who is also head of Texas Tech University's Ph.D. in financial-planning program. Read the study, "Old Age and the Decline in Financial Literacy,"? at this site.
In their study, Finke and his co-authors created a test of the money, insurance, investment and credit knowledge Americans need to make basic financial decisions.
MarketWatch created a money quiz using the 10 questions from Finke's study that respondents found most difficult to answer correctly. Take the test, and see how you stack up against others in your age group.
Here's what Finke and his colleagues found. First, Americans, regardless of age, are on average financially illiterate.
In fact, for the 10 questions we replicate in our quiz, the respondents in Finke's study answered on average just five of those 10 correctly. (Finke used 16 questions related to financial literacy in his study.)
"If you look at the questions, these are things that you need to know to navigate financial markets,"? Finke said. "A lot of people are not able to effectively do that, even when they are at full capacity"? It's amazing what people don't know."?
Second, Finke and his team noticed that financial literacy peaks in the late 40s "â? those aged 45 to 49 answered on average 6.4 of the 10 questions correctly "â? and that there was a statistically strong and consistent decline in financial literacy among older respondents.
Those in their early 80s answered on average just 3.3 of the 10 questions correctly.
There's been other research about crystallized intelligence (financial decision-making is a form of crystallized intelligence that requires both memory and problem-solving skills) and fluid intelligence (the capacity to think logically and solve problems in novel situations, independent of acquired knowledge) and how it changes over time.
It's not news that cognitive performance improves from youth to middle age, at which point it peaks before beginning a steady decline, and that middle-age adults may be at a decision-making sweet spot. That's what a group of researchers including David Laibson, a Harvard University professor, discovered in their research published in 2009.
Laibson and his team found that older Americans are inclined to make more financial mistakes with credit than middle-aged Americans. Older Americans didn't use credit-card balance-transfer offers correctly, they incorrectly estimated the value of their house, and they paid higher interest rates on loans than middle-age Americans, according to Laibson's study.
In effect, they found, as did Finke, that cognition peaks in middle age. Read the 2009 study co-authored by Laibson at this site. Read more: Why geezers give the best investment advice.
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Robert Powell writes about retirement issues and produces the "Retirement Weekly" subscription newsletter.
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