The Dynamic Nature Of Financial Welllness As We Age

Excerpted from my latest column in the Journal of Financial Planning

I have previously characterized financial wellness as a hierarchical pyramid[i], analogous to Maslow’s hierarchy of needs[ii]. In this conceptualization, the financial wellness pyramid is comprised of five levels (starting from the bottom of pyramid): organizational wellness, physical wellness, cognitive wellness, behavioral wellness, and holistic wellness.

But financial wellness is process, not a static state, and the concept of financial wellness as a hierarchical pyramid should not mask the dynamic nature of achieving wellness. There is a distinctive time element to attaining holistic wellness, that is, in “moving up” the various stages of the pyramid. Moreover, for most people, achieving wellness is a non-linear process. Certain stages of the pyramid may be more easily reached than others, and some people may get “stuck” in one or more levels as they seek to ascend the hierarchy.

There are at least three causal mechanisms associated with aging that influence a person’s ability to reach and maintain each stage of the pyramid. Every person is different, but the journey of financial wellness over time will be shaped in some way by at least one, if not all three of these factors.

Health and financial wellness

The most obvious way aging affects our financial wellness is via changes in our health status. Older adults are less healthy than their younger counterparts. Approximately 80% of adults over the age of 55 suffer from at least one chronic illness, like diabetes, asthma, or cancer. By age 65, that figure rises to roughly 86%.[iii] About 18% of children aged 0–11 years, 27% of young adults aged 12–19, 46.7% of adults between age 20 and 59, and 85% of adults age 60+ used prescription drugs in the past 30 days.[iv] The average 65+ year old adult takes four medications, and 39% take five or more.[v]

In short, achieving and maintaining “physical wellness” becomes more difficult over time.

Life transitions

The ability to successfully manage important life transitions – a move to a new location, the birth of a child, a marriage - ?is critical to our emotional and physical well-being. It is also crucial to our ability to achieve and maintain financial wellness.

For most of us, our adolescence and early years of adulthood are characterized by frequent life transitions. We make new friends, attend new schools, go off to college, start our career, and perhaps get married and have a child.

But then, for many of us during the middle decades of our lives, things tend to settle down. We become more established in our careers, figure out how to parent our kids, deepen our personal relationships, and become more comfortable with who we are and what we are doing.

Later in life, however, we are again confronted with the need to manage major transitions. Most people want to retire, or at least work a lot less, once they reach their mid-sixties. The retirement transition can be quite challenging, especially for men. Health events, including the death of a spouse or parent, can initiate the need for major life adjustments, including the need to move to a more age-friendly living situation, and dramatically change a person’s lifestyle, dreams, and goals.

Learning

The third way that aging impacts our financial wellness is via the learning process. As we get older, we learn how to manage our personal finances and healthcare needs more effectively, make better decisions about our health, and improve our lifestyle choices. This process is often referred to as “crystalized” learning or intelligence. As people age, they accumulate a larger mental database of information and skills, which in turn can be used to solve problems and make important decisions.

So, for most of us, learning has a positive impact on our reasoning powers and personal choices as we age. Over time, knowledge gaps get filled in, impulses are checked, and financial wellness improves.

Up to a point. A major study has concluded that “peak” financial reasoning occurs at age 53.[vi] Other studies have found that for many adults, financial literacy starts to decline after age 50.[vii] Dementia and other health issues can have significant impacts on our ability to learn new concepts and facts, as well as our capacity to remember old ones.

Many people reach “peak wealth” at the same time they experience a permanent decline in their capacity to make sound financial decisions. This can be a dangerous period if their decisions are not closely monitored. Even the best laid financial plans can be torpedoed overnight by a few unsound or impulsive decisions.

Final thoughts

The dynamic nature of financial wellness has important consequences for the services and advice provided by financial professionals. Younger clients will require more coaching through life events and need more help with basic financial literacy and education. Most middle-aged clients will require fewer major course corrections but will need assistance preparing for health- and longevity-related risks that jeopardize their long-term financial and retirement security. For older clients, much of the focus needs to be on helping them through major life transitions and monitoring and managing signs of cognitive decline.

In short, financial wellness is a journey, not a destination. Recognizing and meeting the wellness requirements of different clients at different stages of their lives is critical to successful financial planning.

[i] Heye, C: Introducing a Hierarchy of Financial Wellness, Journal of Financial Planning, September 2020

[ii] Maslow, A.H. (1943). "A theory of human motivation". Psychological Review. 50 (4): 370–96

[iii] “Percent of U.S. Adults 55 and Over with Chronic Conditions”, Center for Disease Control (CDC), 2008 National Health Interview Survey, https://www.cdc.gov/nchs/health_policy/adult_chronic_conditions.htm

[iv] Crescent B. Martin, M.P.H., M.A., Craig M. Hales, M.D., M.P.H., Qiuping Gu, M.D., Ph.D., and Cynthia L. Ogden, Ph.D., M.R.P.: Prescription Drug Use in the United States, 2015-2016, NCHS Data Brief No. 334, May 2019

[v] AgingCare, https://www.agingcare.com/articles/polypharmacy-dangerous-drug-interactions-119947.htm

[vi] Agarwal S, Driscoll JC, Gabaix X, Laibson D: The age of reason. Financial decisions over the life-cycle with implications for regulation. Brookings Papers on Economic Activity 2009; Fall: 51-101

vii] Finke MS, Howe JS, Huston SJ: Old Age and the Decline in Financial Literacy, Management Science, January 2017