Safeguards for Aging Investors

By Martha M. Hamilton
Sunday, July 15, 2007

It's official now. I'm past my prime.

It's been attested to by four economists who concluded that "the sophistication of financial choices peaks around age 53."

The four weighed several factors to come to their decision. They looked at the interest rates consumers paid for home-equity loans and lines of credit, auto loans, personal credit cards and small-business credit cards. They studied how consumers respond to balance-transfer offers from credit card companies. They also examined which consumers get stuck with late fees, cash advance fees and over-the-limit fees on credit cards.

What they found was that, controlling for many other factors, "middle-aged adults borrow at lower interest rates and pay fewer fees compared to both younger and older adults."

The study was conducted by Sumit Agarwal of the Federal Reserve Bank of Chicago, John C. Driscoll of the Federal Reserve Boad, Xavier Gabaix of New York University and David Laibson of Harvard University.

Their theory is that as analytic performance diminishes, which they say "research on cognitive aging implies" begins at around age 20, it's more than offset by an increase in experience -- until the early 50s, that is.

All this might be just academically interesting were it not for the ways in which retirement is changing, demanding more financial decision-making by retirees. Instead of depending on a pension check arriving every month, those of us who have saved money in those newfangled "defined contribution" plans such as 401(k)s will be playing a major role in money management as we age.

My mother, Evelyn McNeil, is a beneficiary of the old system of traditional pensions. She doesn't have to think hard about retirement financing. The money just rolls in. It rolls in from her Texas state teachers' pension. It rolls in from the pension my dad earned as a machinist working for Exxon's Baytown refinery. And the dividends roll in from the Exxon stock he bought.

Nor does she have to worry about health-care costs or finding a good Medicare supplementary policy. She is covered under two retiree health insurance plans in addition to Medicare.

At 93, she is in pretty good shape mentally, despite three strokes. She reads constantly and remembers and can recite more poetry than anyone I know, and she can still beat her children and grandchildren at word games.

She tends to get numbers mixed up, but that's okay. My sister JE pays her bills and keeps tabs on her bank accounts. What's more, my mother doesn't have to worry about making required minimum distributions from a 401(k) plan and whether those withdrawals mean she needs to rebalance her mix of assets.

But going forward, an increasing number of aging Americans will have to deal with those issues, a fact acknowledged in the conclusion of the study. "If age effects are important, economists should analyze the efficiency of modern financial institutions -- like defined contribution pension plans -- that require retirees to make the most of their own saving, dissaving, and asset allocation decisions."

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