How the Age Wave Is Remaking Financial Advice

So "you don't want to get to the point where increased confidence in yourself encourages you to start gambling with large sums of your retirement needs," says Lewis Mandell, financial economist, and professor emeritus of finance and business economics, the University of Washington.

Analytic intelligence peaks at age 20. On average, overall ability to make financial decisions peaks at 53; and as we age, the rate of decline steadily increases, according to Mandell. However, as we grow older, experiential intelligence slowly increases "because we've done more things. It tends to keep increasing for much of [the rest of] our lifetime."

"To the financial advisor, [cognitive decline] means, more so than ever, that there certainly are a lot of older folks in need of a really capable advisor," says Mandell, author of "What To Do When I Get Stupid: A Radically Safe Approach to a Difficult Financial Era" (Point White Publications, 2013). "They need someone who will focus on strategic investment needs rather than tactical ones."

Mandell recommends "automatic-like" investments that "lock up wealth and need little management. A good planner will try to make sure that basic needs are adequately covered and also [separate] a small piece of the portfolio for the client to play with. But all the rest should be to provide and be invested in secure-enough things to generate income needed for the rest of the client's life."

Along those lines, an immediate annuity may be appropriate, Mandell says. "It's a very good investment for someone who needs cash flow for the rest of their life that they can't generate just from dividends and interest. A single-payment immediate annuity is a good way to supplement cash flow on which they're going to depend for their needs."

Alzheimer's is the disease that respondents, age 25 and up, said they worried about most—more than cancer, stroke, heart disease, diabetes and arthritis combined—in a 2014 Age Wave-Merrill Lynch study, "Health and Retirement: Planning for the Great Unknown."

Since Alzheimer's remains little understood, including predicting its duration, "this is something that's unique to think about in terms of planning, "Hutchins says. "But it certainty needs to be [addressed] in terms of the financial pieces that must be put in place to, at least, avoid being a burden on the family."

Longer Lives

A number of studies have found that once people reach 65 and are in relatively good health, they will probably live into their 70s, 80s or even 90s. Along with that, of course, comes greater likelihood of need for long-term care. According to Hutchins, 70% of people now 65 will require it.

"That's a huge number!" she says, noting that "two-thirds of unpaid caregivers are women, 14% of them over age 65. So by leaving [the labor force] and no longer contributing to their retirement plan, they're sacrificing their own retirement to care for a family member."

It is also imperative to focus on clients' ongoing, routine health care costs in later years, as Medicare covers only "a little bit over 60%," Hutchins notes. "You need to be thinking about $4,000 to $5,000 a person per year. With a 20-, 30- or even 40-year retirement, we have to factor that increased longevity into our planning."

At the same time, retirement, per se, is being reimagined and reinvented. Irving, in fact, insists that retirement is detrimental. "Retirement is oversold," he says. "Retirement is bad for your wealth and bad for your health. Research shows that remaining engaged has all kinds of positive outcomes associated with it, including lower disease rates and longer lives."

To be sure, many aged 65 and older are still on the job or opened their own small businesses or kicked off second careers.

"The new rules of retirement are to work longer. We have to prepare for 50 years of work," Joe Coughlin, Ph.D., director of MIT AgeLab, has noted.

And Irving stresses: "Traditional retirement planning in the way that many advisors talk about it doesn't really reflect what is well recognized by data as being the direction of older people today. So those messages from financial advisors need to change. That means more holistic planning."

The industry, Irving continues, "has a fantastic opportunity to think more broadly about how people will age and more creatively about the opportunities associated with a longer stage of life in which they are reasonably healthy and have more flexibility" to continue to be productive.

But for millions of baby boomers, the twilight years will be a nightmare. One-third of them have less than $1,000 in total net lifetime assets, Dychtwald says. "This is a disaster waiting to happen. Boomers have largely lived their lives with the belief that money grows on trees or that there's always another loan you can get," the psychologist adds.

"So, what I see going forward," he continues, "is a substantially large percentage of retirees who will be struggling financially, living in anxiety and being a burden to their families. That third of the generation will find themselves at or near the poverty level. Another third, who worked hard, invested wisely and will probably be the recipients of an estimated $15 trillion of their parents' wealth, will be in great shape."

Talking with clients earlier about the decades before them and creating a cohesive, comprehensive financial plan makes the young-old more hopeful about their finances, studies show.

"We're doing our clients a big disservice if we're not discussing these issues or helping them put contingency plans in place," Hutchins says. "But the flip side is that if we start having candid conversations earlier and often, clients feel prepared and enlightened."