Impaired Financial Decisionmaking Begins At Least 6 Years Before Dementia Diagnosis

Dementia may be detectable from an individual’s checkbook up to six years before an official diagnosis, according to a National Bureau of Economic Research paper published in January.

While existing research suggested wealth might decline before symptoms are clinically recognizable, the mechanisms behind that sensation were unclear. NBER’s new study revealed that impaired financial decisionmaking is the best explanation to support the divergence in wealth between individuals who were later diagnosed with dementia and those who were not.

Looking in the ‘Checkbook’

“While doctors have long counseled that you ‘look for dementia in the checkbook,’ it’s taken recent advances in big data to be able to quantify this phenomenon,” wrote Lauren Hersch Nicholas, a professor of medicine and geriatrics at the University of Colorado Anschutz School of Medicine and co-author of the NBER paper, in a response to emailed questions.

Not counting financial debt, about half of the losses in the six-to-eight years leading up to an individual’s diagnosis stemmed from financial wealth, which included liquid assets such as stocks, bonds, checking and savings accounts, CDs, individual retirement accounts and Keogh accounts—things that “involve more complex financial decisionmaking,” according to Jing Li, associate professor of health economics at the University of Washington School of Pharmacy and co-author of the paper. Non-financial wealth included the net value of real estate, vehicles and businesses.

Financial wealth was the only type of wealth that decreased in the four to six years before dementia onset, by an average of $16,800. In the two years prior to dementia onset, non-financial wealth caught up: individuals saw a $26,164 decline in financial wealth and a $33,033 decline in non-financial wealth. Li says the decline in non-financial wealth can likely be attributed to individuals selling their houses and paying for residence in a nursing home, a phenomenon that typically occurs up to two years before an official dementia diagnosis.

The paper examined and refuted five other potential hypotheses to explain the wealth divergence, including that individuals with cognitive impairment:

• Received reduced earnings due to the difficulty carrying out their job tasks;
• Spent more out-of-pocket to seek treatment for their condition;
• Intentionally spent down their assets to qualify for Medicaid coverage of a nursing home residence;
• Spent rationally in realization that they would get more utility from a dollar spent before they are cognitively impaired; and
• Became cognitively impaired because of a negative shock to their wealth or health.

“All evidence points to the dementia-linked financial problems being mistakes,” wrote Nicholas. It is “very concerning given the large expenses for health and social care that typically accompany dementia, the fact that these losses can harm financial well-being of other members of the household, and the impossibility of going back to work to replace these losses.”

Protecting Against a ‘Universal Risk’

Li emphasized the mitigation strategies that NBER’s new research suggested.

Dementia should be treated as a “universal risk,” says Li. “Everybody has a non-zero probability [of developing it]. You should be actively thinking about preventing the financial consequences of it while you’re in perfect health.”

The paper encouraged individuals to implement structural safeguards against wealth loss, such as designating trusted financial contacts and allocating parts of retirement wealth to products with guaranteed payouts, to reduce exposure to losses from impaired financial decisionmaking.

“A major challenge is that as we are losing the skills that help us manage money, it is common to also lose the ability to assess ourselves accurately—promoting overconfidence at the same time skills deteriorate,” wrote Nicholas. “Thus, we basically need insurance against our future selves.”

Additionally, “cognitive decline is linked to an increase in altruism,” says Li. Families can watch for warning signs of dementia, such as sudden generosity in the form of large donations to particular people or charities.

Kelli Send, senior vice president of Francis LLC, previously told PLANSPONSOR that the Employee Retirement Income Security Act does not carve out any specific actions that fiduciaries must take to protect this particular population of participants. However, the duty for plan sponsors to work in the sole best interest of the participants still applies.

In addition, financial firms can leverage FINRA Rules 2165 and 4512(a) as tools to help protect participants that experience cognitive decline. The former allows broker/dealers to place a temporary hold on the release of funds or securities from a participant’s account when there is reasonable belief that they are being exploited, and the latter requires broker/dealers to make a reasonable effort for each of their non-institutional customer accounts to obtain a name and contact information of a trusted contact person.

“As populations age, failing to recognize and insure against the financial risks posed by early cognitive decline will place a growing burden on affected households,” the paper stated. “Broader institutional and policy measures that help households protect assets well before symptoms emerge may play a key role in mitigating the long-run financial consequences of dementia.”