Often the hardest decisions people face when it come to saving for retirement is deciding what they want to do after they quit working. Considering that for two healthy 65 year olds today one could live to 90 or older, they must figure out how much they can spend each month while leaving enough to cover increasing health costs for the rest of their lives, however long this might be.
Compared to this, saving is easy. During the saving stage, all people believe they need to do is allocate some of their paycheck into investment savings. If the investments don’t grow as expected, the hope is that the income they keep adding will make up the difference. Unfortunately there’s significantly less room for error once retired because there’s no way to replenish their savings if they choose the wrong investments or spend too much.
As we age, our brains fade. This is a cruel fact of life, which means that just as we are expected to make some of the most complex financial decisions of our lives, our cognitive abilities are on the decline.
Fortunately, older folk have high levels of Crystallized intelligence, which is the total sum of all their knowledge, experience, and expertise. This is the kind of intelligence that is useful in making wise financial decisions. Compared to this is Fluid intelligence, which by contrast, is the speed and capacity we have for generating, transforming, and manipulating information. The rate of loss of this kind of intelligence varies between individuals, but typically declines as we age, reflected in our lower reaction times and the loss of our short-term memorization ability.
A recent university research program studied how credit scores varied by age and the two forms of intelligence. In terms of the ability to make shrewd financial decisions, the researchers found that older people more than made up for their diminished fluid intelligence if they had gained experience and expertise in financial matters throughout their working lives.
This has major implications for retirement savings that can impact people of all ages. The riskiest thing people can do is to not pay attention to their financial matters until late in life. People who left financial matters to their spouse often struggle with their finances when they are widowed. Needless to say, learning financial concepts when you are 70 is harder than when you are 40, even if when retired you have a lot of free time on your hands.
It’s not enough to simply save, it’s also important to gain financial literacy as well. The more knowledge you enter retirement with, the better off you’ll be to make good, fundamental, life-altering financial decisions. Because it’s harder to gain new knowledge as you age, it’s important to build expertise early the same way you build assets. Plus with today’s abysmally low fixed income rates, seniors need to be much more financially savvy with their investments in order to generate both adequate and sustainable income for as long as they live.
To help navigate today’s ever more complex world of investing, seek out a trusted financial professional to help you focus in on those that fit your risk tolerance, while at the same providing long-term income.
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