Do Retirees Make Better Financial Decisions? | The Charitable Payraise

Does aging make you smarter or does it gradually weaken your cognitive abilities? A study from Columbia University and the University of California, Riverside, has shown some interesting results.

A group of 20-somethings and individuals in their 60s and 70s were put through their paces on a variety of financial topics, including basic financial literacy, awareness of debt, risk tolerance, and how much the participants thought about their financial destiny. The older test-takers performed better than the younger test-takers in almost every category, despite an overall decline in mental ‘sharpness’.

In order to understand the findings, the researchers distinguished between two types of intelligence: fluid and crystalized. Short-term memory, problem-solving skills, and the capacity to manipulate and swiftly assimilate information are all components of fluid intelligence. A “stable repository of knowledge acquired through experiences, culture, and education” is what is meant by crystallized intelligence.

We develop crystallized intellect as we age, while losing fluid intelligence. The study finds that “it is likely that the negative impacts of aging will outweigh its favorable effects very early in middle age for decisions that largely rely on digesting new information.” On the other hand, age may be a benefit if the choice depends on identifying previously acquired patterns in a stable environment.

It turns out that relying on knowledge, experience, and “already learned patterns” is preferable to displaying the capacity to absorb new information rapidly while making the majority of financial decisions. In specifically, there are five areas where elderly people excel above younger people:

1. Retirees have a better grasp of debt and finances

Older people are better at making practical judgments because they have more information about assets, loans, and interest rates. They are more inclined to begin with saving and investing, then go on to make wiser financial judgments like picking mutual funds with low fees. Additionally, they steer clear of borrowing with high interest rates by avoiding payday loans and holding credit card balances, as well as other costly borrowing practices like paying exorbitant bank fees.

2. Older folks have better emotional control

They are less inclined to panic and sell at the bottom after buying at the high. They are less likely to buy on a hot tip or capitalize on the most recent investment fad, which is nearly always a mistake. Older folks have a lower propensity to get drawn into an unstable financial situation based purely on a trend.

3. They are more adept at ignoring unimportant information.

The majority of elderly investors are able to block out the noise from the financial media, which places too much emphasis on the day’s news, especially when it has little to do with your assets. Older investors are aware that while today may be stormy, tomorrow may see the sun come out or vice versa.

4. More experienced (older) investors understand their own limitations

Young individuals are often overconfident, arrogant, and convinced of their own superiority. Their more experienced siblings have lived through some painful situations and are aware that predictions don’t always come true. And a little humility is the most crucial trait in a smart investor. The frustration of hoping against all odds that a lost investment will turn around is well known to seasoned investors. They have the self-control to accept a slight setback now rather than hold out for a major calamity.

5. Retirees are more patient

They are better equipped to withstand market fluctuations without panicking. And they don’t tend to make rash decisions as the financial wind shifts. Day traders almost generally lose money, while younger individuals with faster information processing skills may be better candidates. The wisdom and expertise of an experienced investor will ultimately prevail, according to those who are carefully and strategically slowly amassing riches over time.

The bottom line? The best advice you can get about preparing for retirement might be from people who’ve already done it.