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By Christine Benz | 05-12-2014 12:00 PM

How to Safeguard Finances Against Cognitive Decline

At least one in 10 seniors will be affected with dementia, but family members can take several approaches to assist with the financial decision-making.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Dementia is growing issue in the elderly population and that has implications for retirement planning. Joining me to discuss this topic is Steve Starnes, a financial planner with Savant Capital Management.

Steve, thank you so much for being here.

Steve Starnes: Thank you so much for having me.

Benz: The issue of dementia in the elderly population is a growing concern. How likely is it that men and women will be affected by dementia during their lifetimes?

Starnes: Unfortunately, a lot of people will be affected, approximately one in 10 men and one in 5 women. And for people over 85, 50% of them are affected by dementia. So it's quite a significant risk.

Benz: And why is dementia growing as a risk for the population.

Starnes: I think a primary factor is people are just living longer, and the medical community is still trying to figure out what causes it and what they can do about it.

Benz: A lot of issues can crop up when people have a diminishment in mental function. And a lot of these issues relate specifically to household financial management. Can you talk about some of the typical pitfalls that someone with dementia might fall into?

Starnes: One of the really important things for us all to recognize and the medical community has shown is that difficulty with personal finances is one of the first things people have trouble with in the very early stages of dementia. What that means is people may make some mistakes with their finances, make some very expensive mistakes, before family members or friends really know there is something wrong.

So this can be anywhere from disorganization, not paying some bills, to making some really expensive mistakes. I had a person come, to me and before coming to me had taken all of their money out of their IRA account in one year.

Benz: Which triggered a giant tax bill.

Starnes: Triggered a giant tax bill, a tax bill of $100,000. And that’s an expense most people can't afford. And he was just confused. He didn’t know what he was doing but otherwise seems very healthy.

Benz: I think a natural question for a lot of people who are committed, do-it-yourself investors who want to run their own financial plans is what kinds of safeguards can they put in place for their own financial plans to ensure that if, at some later date, dementia does affect them, how can they make sure that they don’t make those big expensive mistakes? Do you have any tips?

Starnes: Absolutely. One of the first and most important things you should do is have a conversation with your family. Identify who would be the person to help you if something's wrong. Then talk about your values and what kind of help you want. One of the concerns people with cognitive decline have is they worry about losing independence. And if you have a conversation ahead of time about how you want to be helped, that can really be valuable.

Second is simplify things. In the course of our lives we collect accounts all over the place, several accounts at several different banks, maybe one with a toaster, maybe one with a gift certificate, and accounts at different investment companies. It's hard for you to keep up with that, and if someone needs to help you it will be hard for them to keep up with that. Get accounts at one bank and one investment firm and just simplify it.

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