Old Age and the Decline in Investment Performance

Abstract

Retirees in industrialized societies are increasingly encouraged to fund their own spending in retirement through publicly-subsidized savings programs. Individuals are then responsible for investing these assets through retirement to support a lifestyle. Unfortunately, there is evidence that age-related cognitive decline has a negative impact on a retiree’s ability to manage an investment portfolio in later life. Individuals over age 60 exhibit a gradual decline in financial literacy that reduces observed decision-making quality. Older investors are not able to fully capture an equity risk premium that may be attributed to time varying risk preferences that erode investment performance. A lack of awareness of decline in financial capability also increases vulnerability to financial exploitation. Improved investor protections and the use of financial instruments that automate the management of retirement portfolios to produce lifetime income can improve the financial security of retirees.

Keywords: Financial literacy, cognitive decline, investment performance

JEL Classification: D14,G11