We're late learning our financial ABCs and then in old age we
forget what we've learned, says behavioral economist Lewis
Early in his career, Mandell preached that young people weren't
mastering personal finance. As he approached retirement, he turned
his studies and research to people his own age and older. The
conclusion: Financial wisdom peaks in the 50s and then declines
steeply, making seniors more vulnerable to bad decisions.
But we're not all doomed to be doddering idiots losing our nest
eggs to greedy second spouses and kids, unscrupulous advisers and
our own financial ineptness, Mandell says. We can take action now
to protect ourselves in our dotage.
Mandell, professor emeritus of finance and managerial economics,
and former dean of business at State University of New York at
Buffalo, took inspiration from his own parents. "My parents retired
and went through some of the worst times in the economy -- very
high inflation and recessionary times," he says. "Without having a
huge amount of income coming in, they kept saving more and more
money. They weren't huge penny pinchers. I asked 'How is this
possible?' I started writing a book about them."
He widened his approach beyond his own parents and in his new
book, "What to Do When I Get Stupid," Mandell describes how and why
you should take action now while you still have your financial wits
about you to protect yourself from others and your own bad
decisions as you age.
Q: How was it possible for your parents to save?
A: They own their own age-in-place home. They have no debt.
Q: Why is an age-in place home important?
A: If you have not prepared for your older age by having a
master suite on the ground floor and no stairs to get in and out of
your house, you're asking for trouble. People often have to go into
nursing homes or assisted care because they couldn't get into their
bedroom because it was upstairs. If your home is totally paid for,
then what you really need to live on in retirement becomes
Q: What advice would you offer retirees regarding credit cards
A: In my new book, I stress the importance of safety for retired
persons who wish to maintain their standard of living for the rest
of their lives. Being debt-free, if possible, is an
important component of safety.
However, in my three previous books on credit cards, I stress
the difference between the transaction use of credit and the debt
use of credit, which is important here. Pure transactors, who
have the ability and willingness to pay off credit card balances
each month, can safely use credit cards for their convenience
value, particularly when traveling. I would caution retired
temporary or permanent revolvers against the use of credit cards
and encourage them to use debit cards instead to avoid finance
charges as well as the inadvertent build-up of leverage that can
work against them.
Q: What else contributed to your decision to write this
A: I had a good friend who asked me about getting an annuity. I
said, 'That's a dumb idea. Why in the world would you want an
annuity now? Didn't you sit in on my seminars?' Then my friend
said, 'What happens when I get stupid?' I realized that maybe we
should consider putting our finances on automatic so we can't screw
up on our own financial situation for ourselves and our loved ones.
I decided to lead off with very good research being done on
diminishing financial cognition. Then, I focus on how do we deal
with it while we're still cognitive.
Q: You say in your book that cognitive ability related to credit
cards and borrowing peaks around age 53, but investment skills
don't peak until age 70. Why the difference?
A: As I say in the book, the fact that investment skills tend to
peak some 16 to 17 years later than borrowing skills is
probably due to the differing ages at which we gain experience in
borrowing and investing. When we're young and don't have that much
money, we're forced to learn how to borrow in order to finance many
of the things that we need, including education, cars and homes.
When we're older, at or near retirement, we don't need to borrow so
much but finally have some assets accumulated for our retirement.
It is at this age that many of us begin to pay attention to the
financial news, attend legitimate financial seminars, and really
begin to learn something about our investments. Therefore, our
borrowing skills start to build early in life, in our 20s and early
30s, while our investment skills tend to build much later, often in
our 50s and beyond.
Q: What could happen to people as they continue to make
financial decisions as their financial capabilities decline?
A: On the benign end: I forgot to deposit this check. It could
be we've gotten notification of a class-action suit because of bad
deeds of a company we've done business with and we haven't bothered
to fill out the forms. On the less benign end, you may make a
decision based on advertising where a few years ago you would have
said, 'This is stupid.'
Q: Are most people willing to admit their financial abilities
A: Self-sabotage is something most people don't think about.
They think, 'This could happen to other folks.' They've observed it
with people they know. But the research shows that as you get
older, not only do you become less competent to understand complex
things -- you also become more convinced of your ability in this
Q: Back to the annuity: Did you change your mind and if so,
A: Not having really studied the matter, I thought that buying
an annuity when market interest rates were low meant sacrificing a
lifetime cash flow. When I actually crunched the numbers, I found
that a doubling of interest rates from 1 percent to 2 percent would
affect annual annuity payments by very little -- just 7.3 percent
for a 70-year-old man investing $200,000.
Q: Why do people need annuities?
A: The greatest risk is living too long. That's why we all need
annuities -- we all know people who live to be 100. But fewer than
1 percent of people have an annuity. Economists who study this call
it 'the annuity puzzle.'
Q: What kind of annuity do you recommend and why?
A: Like most economists, I like an immediate (or deferred)
single payment fixed annuity from a highly rated insurance company
that will pay the greatest monthly amount per dollar invested.
Variable annuities tend to have less certain returns and generally
have higher fees and selling costs associated with them. What
people regard as the disadvantage of single payment annuities, I
regard as one of the biggest advantages -- the inability to cash it
in. That's money you can never be cheated out of.
Q: What is the most important takeaway from your book?
A: The single most important thing you can do is delay taking
your Social Security until you turn 70. Not only does Social
Security give you an 8 percent return for every year you wait, that
8 percent is a real rate of return that's protected against
inflation. No one else is giving you a real rate of 8 percent. The
single best annuity is Social Security because it not only pays you
as long as you're alive, but it also adjusts to the cost of
Q: What about the fear that Social Security will collapse?
A: I spend a lot of time talking with people who are connected
with Social Security. Social Security is not going to go out with a
bang. It's going to decline with a whimper. There are still so many
ways to fix Social Security so it will still be around. The most
likely fix is raising the age at which you get your full Social
Security benefits. I feel the age will be extended. But people will
be given sufficient warning.
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