Why financial literacy declines in old age – and what we can do about it

Professor Mitchell, your new study on financial literacy in old age is considered a breakthrough. What makes it so special?
For the first time, we were able to follow the same people over many years and observe how their financial and health literacy changed as they aged. Earlier studies only measured financial literacy at a single moment in time. Our approach, on the other hand, shows not only the differences between age groups, but actual changes in the same people over time. And very clear pattern emerged: both men and women experience a steady decline in financial literacy as they grow older.

How steep is this decline?
On average, financial literacy drops by 12 percent between the late 60s and early 80s. What surprised me most was how consistent this decline is. It's not a sudden collapse, but a gradual decrease in performance of about one percentage point per year.

I also experienced this with my own mother: in the last years of her life, she suddenly started paying bills multiple times or repeatedly renewing magazine subscriptions without realising it.

Why does the decline become particularly visible after age 80?
It is not that something suddenly happens at 80. Rather, the effects of cognitive aging accumulate over time. In very old age, the consequences simply become much more visible. Financial literacy acts as a protective shield. If this shield becomes about one percentage point thinner each year, people increasingly lose the ability to make complex decisions or recognise warning signs – such as in cases of investment fraud.

What exactly declines – knowledge, judgment or decision-making?
Primarily, it is knowledge and numeracy. People become less comfortable with basic financial and health concepts. What is particularly problematic is that even they are often unaware of this decline. Their self-confidence often does not decline at the same rate. On the contrary, some people become even more confident despite performing worse. That creates a dangerous situation because they may not realise they are making poor decisions.

How can families tell that something is no longer right?
One warning sign is when someone suddenly struggles with calculations or financial concepts that used to be easy for them. Many people do not notice this themselves. That’s why it’s so important to have someone they can trust who can recognise such anomalies. In my mother’s case, repeated bill payments were an obvious signal that she needed help.

You and Annamaria Lusardi together developed the “Big Three” of financial literacy. Why are these so crucial, even in old age?
Because they capture the foundations of financial decision-making: compound interest, inflation and diversification. If people lose their understanding of those concepts, they become much less able to spot unrealistic returns, hidden risks or fraudulent promises. In other words, the decline in financial literacy directly increases vulnerability to scams.

And at the same time, the scams are becoming more and more sophisticated?
Absolutely. New technologies such as artificial intelligence are making scams much more convincing. People are confronted with deceptively real voices, automated calls or personalised messages. Older adults are particularly vulnerable because declining financial literacy also reduces the ability to critically evaluate information.

What are the biggest financial risks in very old age?
Three risks stand out in particular. Firstly, irreversible wrong decisions, for example claiming pensions too early. Secondly, incorrectly managing your savings, meaning that your money does not last for the rest of your life. Many people underestimate what is known as the longevity risk: they do not expect to live significantly longer than anticipated. And thirdly, fraud.

The worst part is that, in very old age, there is often little time left to recover from financial missteps or financial losses.

Are men and women equally vulnerable?
While men and women lose their financial literacy at similar rates, women often start from a lower baseline – this is a global trend.

In addition, women on average live longer and therefore spend more years exposed to declining financial literacy. At the same time, in many households, men continue to make the financial decisions. When their partner dies, many women don’t know how to deal with complex financial issues.

What should couples do differently?
Financial decisions should never be completely outsourced to one partner. Both partners should understand how their household finances, pensions, insurance and investments work. Otherwise a partner’s death could suddenly lead to what I call a “competence shock”.

What responsibilities do families have when they notice that a parent’s judgment is declining?
Families should intervene gradually and respectfully, without immediately taking away the older person’s independence. Older adults understandably want to maintain their independence. It is therefore crucial to create safeguards early on rather than waiting until a crisis occurs. One very effective tool is allowing a trusted contact to have access to bank accounts. In this way, relatives can know about any unusual transactions without immediately removing the older person’s control. I also recommend setting up powers of attorney before they are needed.

When should relatives begin with financial caregiving and have such conversations?
Much earlier than most people think. I tell my students – many of them in their twenties – to start talking to their parents about retirement plans, wills and long-term care now, not later. It is far easier to establish roles and decision rules before a crisis occurs.

You also talk about a “financial autopilot”. What do you mean by that?
A “finance autopilot” means automating financial processes as much as possible. This can reduce mental strain and prevent mistakes. Automatic bill payments or regular savings contributions are extremely helpful. For some older people, lifelong pension products may also make sense, as they provide stability and reduce exposure to poor decisions.

Can better financial education slow the decline later in life?
Yes. The more financial literacy people develop over the course of their lives, the more resilient they will be in old age. Ideally, financial education should begin very early. When my children were young, I created what I called the “Bank of Mom”: They learned quickly that if they wanted something expensive, they had to save and work for it. These lessons are still important – even decades later.