As you approach retirement – as if you don’t already have enough to worry about – a concern should be diminished capacity. Common sense, and a lot of statistics, tell us that as you age, the chance of losing some of your mental faculties is a risk. This risk becomes very real in retirement because you’re now in the process of decumulating your retirement portfolio. And if you’re not properly keeping an eye on this portfolio, someone else may target and deplete your wealth.
Chris Heye, Ph.D., co-founder of the age-focused financial planning software platform Whealthcare Planning, notes that diminished capacity is a very real possibility in retirement, and suggests it calls for proactive management both physically and financially. “You don’t need to be perfectly healthy to achieve financial wellness, however, you do need to secure access to good medical care, make your healthcare advanced directives clear, and identify trusted individuals who can help make decisions.” There are a number of steps you can take to get ahead of this risk. The goal is to go into retirement with a game plan for addressing the diminished capacity risk.
ASSESS YOUR SITUATION
Aristotle instructs that “knowing yourself is the beginning of all wisdom.” The first step in getting ahead of the diminished capacity risk is to assess how this risk applies to you. A recent trend is for financial advisors to ask their clients questions to determine factors that might either cause diminished capacity or at least heighten the risk. Some of this risk could come from genetic risk, such as a family history of dementia. Some comes from demographics, such as retiring at a later age than is typical, and some may result from how your retirement plan is structured. If your retirement income is generated from an investment portfolio versus arriving automatically in the form of a fixed monthly income, there is potentially more exposure to loss caused by your inability to handle your finances.
Another risk to consider is your geographic location in retirement. Are you close to a hospital? Do you live near relatives? Is your mobility limited because of inability to drive? It’s one thing to live in a Continuous Care Retirement Center (CCRC) where you have ready access to healthcare and a community of friends to keep an eye on you; however, it’s quite different to live in a farmhouse, miles away from people and services. An assessment of your planned living arrangements in retirement may affect how you plan for the risk of diminished capacity.
Finally, do you plan to be actively involved with the management of your income and expenses in retirement, or do you look forward to a time when you’re hands-off with day-to-day management of your finances? The former involves the risk that diminished capacity someday robs you of the ability to manage your money, while the latter exposes you to the potential for elder abuse by others.
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LEGAL PROTECTIONS
There are myriad ways to proactively protect yourself from the risks of diminished capacity. The various documents available to you form a legal toolbox for addressing cognitive impairment. The challenge is sorting through your options, getting professional help, and keeping your toolbox up to date.
One of the first concerns is that the term “diminished capacity” can have many meanings. For example, legal capacity to make a Last Will and Testament is far more lenient than the standard that applies to the ability to enter into a contract. You’ll want to make sure that you understand which legal standard applies to the form or technique you plan to use. For instance, if you have a springing power of attorney (POA), the power springs into being when it’s determined you lack the legal capacity to make decisions for yourself. Who decides this? To the extent you have the legal option, you might specify in the POA the process you want used to define incapacity. Should this be determined by your physician, a psychologist, a judge, or some other independent party?
Another consideration is the forum for the applicable document. Many of the tools available for dealing with diminished capacity are based on state law, so it’s crucial to understand what law will apply to your situation. Take the use of a springing POA. Most states allow a financial POA to spring into existence at incapacity, but others require the POA to take effect immediately. And some processes, such as the Social Security Representative Payee program, are controlled by federal, rather than state law.
There are some common tools to consider which provide a process for managing your health and/or finances in cases where you are not capable of making decisions for yourself. These tools should be reviewed and, if applicable, be included in your arsenal while you’re still in control of your faculties.
- Powers of Attorney, as discussed above, are a means of designating an agent to speak on your behalf if you are unable to do so because of a mental or physical impairment. Typically, an individual would create separate POAs for medical decisions and financial decisions.
- Advanced Directives are particularly important with decisions related to healthcare. This may include living wills, portable medical orders (POLSTs), and do-not-resuscitate orders (DNR).
- Trusts can be drafted to pre-select a trustee to make financial decisions for you if you are unable or unwilling to do so. A common estate planning arrangement is to establish a living trust, where you serve as trustee of your own trust. In the trust, you designate a successor trustee to take over when you are no longer able to continue – or simply wish to resign as trustee.
- Guardianships are generally a situation to be avoided because of their expense and rigidity. Think of the travails of Britney Spears. This court-supervised arrangement, however, is a reality when the incapacitated individual is truly a danger to himself or others. Fortunately, some states now permit individuals to indicate in advance who they would want to serve as their guardian should the need arise. This ability to pre-select a future guardian is both a means of anticipating the possibility of diminished capacity and avoiding the risk of having an unwanted individual speaking for you.
- A Social Security Representative Payee is part of a program created to protect recipients of Social Security benefits. Rather than sorting through POAs coming from residents in various states, the Social Security Administration (SSA) has its own process for selecting a representative to act on behalf of the beneficiary with diminished capacity. The beneficiary’s desired representative can be pre-designated and provided to the SSA when filing for benefits.
- A “trusted contact person” is a person that you authorize your brokerage firm to contact if your broker has a reasonable belief that your account may be exposed to possible financial exploitation or fraud. Recognizing that sometimes you may be the last person to be aware of your own cognitive decline, designating a trusted contact in advance gives your broker an independent source to consult if there is fear that you may be the victim of elder abuse.
FINANCIAL TOOLS
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As we age, it should be anticipated that our physical or mental limitations may constrain our ability – or desire – to manage our own finances. In planning your retirement, consideration should be given to techniques which simplify the management of money. Which, if any, of these techniques applies to your situation is highly individualized, but they should be considered in your retirement planning for potential, current, or future use.
- Medicare Part B Premiums are commonly paid out of one’s Social Security retirement benefit. You will likely begin Medicare at age 65 but may choose to delay filing for Social Security until you reach your full retirement age (or later). Upon filing for your retirement benefit, simplify your life by having your Part B premiums withdrawn from your monthly Social Security bank deposit.
- Immediate Annuities are a popular means for converting retirement capital into retirement income. The payments are predictable, secure, and comparatively tax advantaged. Annuity payments may simplify your handling of monthly revenue and expenses.
- Reverse Mortgages can be an attractive way to convert your home equity into a secure stream of monthly payments. By taking out a Home Equity Conversion Mortgage, guaranteed by the government, you can secure a stream of tax-free monthly income that continues as long as you remain in your home. The loan is non-recourse, meaning the bank cannot look to you personally if your home equity is insufficient to cover the payments.
- Cashflow Managers certainly are not for everyone, but in the right situation you can simplify your monthly handling of revenue and expenses by delegating the task to a professional. Even before incurring diminished capacity, some retirees choose to streamline their finances by using these trained money managers. This does not negate the need for legal protections such as POAs, but it can help make retirement life simpler.
No one wants to face the possibility of diminished capacity in retirement, and yet everyone should. As our retirement lives extend out and beyond thirty years, the risk of cognitive decline can be just as threatening to retirement security as loss of income. The good news is you can prepare for and manage this risk far before it happens.