- Saturday 16 March 2024
Research has indicated a ‘magic age’ when your expertise and cognitive abilities align.
Let’s start with the answer! According to a number of studies on this topic, the prime years for making smart financial decisions are, on average, 53 and 54.
At that age, people have accumulated knowledge and experience about money but haven’t begun losing key analytic cognitive skills. It’s also roughly the age when adults make the fewest financial mistakes.
Our experience of working with clients through their decades would lead us to agree with the research, but we are always keen to emphasise that understanding what brings you financial strength in your early 50s is valuable at any age.
Younger adults benefit more from learning about the ‘behavioural’ aspect of money management, along with basics like cashflow modelling, investment philosophies and goal setting. This will hedge against any lack of experience, while those who are older should work to keep their analytical skills sharp and stay as up to date as possible on changes in technology and financial practices.
According to the ARC Centre of Excellence in Population Ageing Research in Australia, “As we get older, we seem to rely more on past experience, rules of thumb, and intuitive knowledge about which products or strategies are better,”.
The team at ARC undertook a 2022 study that looked at financial literacy, which is the ability to understand financial information and apply it to managing personal finances. Financial literacy typically peaks at age 54 and then declines, according to the study.
People can—and do—make good financial decisions from their 20s to their 40s, as well as into their 60s and 70s. We would often identify financial decisions earlier in life that can have unforeseen positive benefits. For example, employees or owners of companies with mandatory pension contributions are usually significantly better funded in later years, through the compounding benefit of those early savings but also through the ‘habit’ of making contributions, even if subsequent employment doesn’t have the same mandatory system. This is hopefully one of the advantages the imminent Auto Enrollment pension system will bring.
Financial decision-making requires a combination of reasoning skills that differ by age. Those in their 20s are better at absorbing and processing new information and calculations—so-called fluid intelligence—but don’t have as much life experience or crystallized intelligence—the accumulation of facts and knowledge. Crystallized intelligence tends to improve with age.
Most of the our recommendations to younger clients are about minimising debt, such as avoiding credit-card use, clearing short term loans and, if possible, paying off mortgages early.
For maximising wealth, we advise using growth funds, even with the extra volatility they bring. Speaking with an older client recently about their investment history, they regretted “letting markets scare us into making changes we shouldn’t have”.
There isn’t an age beyond which getting advice won’t help. Indeed, as that same client noted, “In your 50s, you have enough maturity and experience to know you need help,”.
People make financial mistakes at any and every age, but they make fewer mistakes in their early fifties, according to researchers. In one study, economists looked at financial choices made by adults in a range of financial areas, including personal loans, mortgages and credit cards, and how those decisions affected fees and interest payments.
Fees and interest payments, across all areas, were at their lowest levels around age 53, according to the study in the Brookings Papers on Economic Activity. That age was referred to as the “age of reason,” or the point at which financial mistakes are minimized. A financial mistake would include overestimating the value of a house, for instance.
At the age of 53, “many people have been dealing with financial markets for years and know how to look for the right financial product, and minimize fees and payments,”. That said, while individuals have significant experience capital, going forward into their late fifties and beyond, they are likely to make more mistakes and be slower making decisions. People should keep their analytical skills strong and continue to make good decisions by engaging with advice, reading and learning about money and communicating with partners and friends on the topic.
One financial mistake older clients make involves underestimating their life expectancy, which can lead to flawed planning decisions about retirement. A typical 50-year-old expects to live until age 76, when actuarial estimates have that person living another decade to age 86, according to a study which looked at people in Australia. A 2020 study in the U.S. found that 28% of adults 50 and older underestimated their life expectancy by at least five years.
The other thing to recognise is that people in their 50s have often experienced enough financial pain to make them more acutely aware of the need to weigh all financial alternatives carefully and avoid mistakes. We see this in relation to property, where those impacted by collapse in the property market in 2009 are far more concerned about current prices than those who didn’t.
A good relationship with a Financial Planner can be key to building up and maintaining the necessary expertise around your money. Research showed that those who had a trusted relationship with an advisor were more comfortable admitting where they had knowledge deficiencies and this helped overcome potential risks in the future.
Disclaimer
All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice.
