Study offers answers to age planning issues

One of life’s grim ironies is that the point of maximum wealth often comes at an age when the ability to manage finances begins to go.

A new BMO Retirement Institute report, titled Financial Decision Making: Who will manage your money when you can’t? raises awareness of declining cognitive abilities that afflict ageing boomers and compromise their capacity to make sound financial decisions.

Often caused by Alzheimer’s disease and other forms of dementia, this incapacity can not only leave aging Canadians vulnerable to making erroneous judgment about complex financial matters, but can also have legal ramifications for advisors dealing with such clients.

“Financial capacity is considered a complex mental activity that may be particularly vulnerable to aging,” said Tina Di Vito, head, BMO Retirement Institute. “It’s safe to say that, as one ages, one’s capacity to make financial decisions will gradually deteriorate. This is particularly challenging for aging Canadians since we know that managing money is difficult even under the best of circumstances.”

The report found the majority of Canadians 45 years and older believe investment skill increases with age. Contrary evidence provided by several studies, however, shows that a person’s cognitive abilities decline with age and hinders their ability to make sound financial decisions. That those suffering from dementia are often not even aware of it further complicates matters.

“Often, these diseases have insidious onsets; they start slowly, and symptoms develop gradually,” said Dr. Michael Baker, professor of medicine at the University of Toronto and a member of the BMO Advisory Council on Retirement. “Frequently, it’s unrecognized by the persons themselves and even their relatives until it starts to interfere with daily living. It’s possible that they may function well socially, but have lost the ability to discuss complex subjects like financial matters.”

A Continuing Power of Attorney (CPOA) offers a good hedge against this problem. Tailor-made to deal with incapacity planning, it is a legal document that gives another person legal authority to make decisions about your finances and property and helps ensure a proper delegation of financial affairs in the event one loses financial decision-making abilities.

“Canadians are aware of the need to plan for retirement and for the transition of our estates,” said Di Vito. “However, we often don’t think about the importance of incorporating a continuing power of attorney into our overall financial plan.”

The report reveals that 76% of Canadians 45 years and older are aware of the need for a CPOA, yet less than two-thirds (59%) have actually put one in place. More than half (54%) who do not have a CPOA do not think they need one yet. Over one in five respondents believe they would still have the power to execute a CPOA after being found incapable of making financial decisions.

“It’s very important for Canadians to appreciate that they should plan for mental incapacity while they are still mentally capable,” said Elena Hoffstein, partner, Fasken Martineau DuMoulin LLP and member of the BMO Advisory Council on Retirement. “Without a CPOA in place, often the only recourse is to have a court-appointed guardian manage your affairs.”