Safeguards for aging investors

Like everyone else who’s jumped the fence into “later middle age,” I have senior moments. Words and names flow to the tip of my tongue and stop. I can’t add and subtract in my head as readily as I used to. We may grow wiser with years, thanks to the lessons we reap from experience, but we aren’t as quick.

A 2009 study on financial decision-making called “Age of Reason” put our mental sweet spot — knowledge plus agility — at an average age of (are you ready?) 53.

In short, preparing for retirement is just part of the picture. You also have to prepare for the risk that, at some point, your thinking won’t be as clear as it is today. Some of us will stay sharp (or sharp enough) into our 90s. Others will suffer declines that make us vulnerable to serious money errors or even fraud. Investment advisers face the same question as do our family and friends. What should they do if they think we’re losing our grip on financial decisions?

In a new study, called “Protecting Older Investors: The Challenge of Diminished Capacity,” AARP surveyed the safeguards that financial firms put in place. Most said they’d stop making investment recommendations if they suspected a client was losing track, says Naomi Karp, who headed the research team. Some said they’d wait for clarification if they had concerns before following a client’s instructions to buy or sell.

The tough part is knowing when to sound the alarm — not only for advisers but for you and me. Financial planner Linda Patchett of Chapel Hill, N.C., gets it right when she says, “Within each person rages the tension between maintaining independence and selfhood and recognizing deficits.” Age 60, she says, is “a very good time to bring the issues of aging into sharper focus.”

Four steps to take:

1. Get your documents together, starting with a durable power of attorney (POA). It lets someone make financial decisions for you if you cannot. But POAs can be powerful documents in the wrong hands, so talk over your wishes carefully with the agent you choose. Your document dump should include an up-to-date will, living will, health care power of attorney and current beneficiary forms for an individual retirement account and other assets. People in the initial stages of dementia might consider a do-not-resuscitate order, to prevent future overtreatment by doctors at a time when they can’t choose, says Brentwood, Tenn., planner Mark Nickell.

Don’t forget the digital documents. When a client of Patchett’s threw out her husband’s computer after his death, all of his passwords and payment records went with it. Reconstructing them was expensive.

2. Know someone who can give you a second opinion — a responsible adult child, a financial adviser or a capable friend you’ve known for a long time.

I hear a lot of stories. For example, Princeton, N.J., planner Martha Ferrari had a client whose children were urging her to deed them her home. Their objective was “Medicaid planning” — making her poor enough to quality for government aid. After getting professional advice, she updated her power of attorney so that her kids couldn’t take the home out from under her.

Chicago planner Andrew Feldman had a client who asked a bank how to get higher interest on her savings. Instead, the bank sold her an expensive mutual fund that owned stocks. Planner Cheryl Sherrard of Charlotte, N.C., says she listens carefully when a client gets a “new friend” in a retirement community who wants to advise her on investments.

3. Read the fine print before buying a variable annuity with a nursing home waiver. In theory, you can access your money penalty-free if you need long-term care. But that didn’t work for a client of planner Bill Houck of Westwood, N.J. The client’s father has Alzheimer’s, and she tried to exercise the waiver on the annuity he owned. The insurance company turned her down. It said it waived fees only for people in nursing homes, and her father was in an Alzheimer’s “assisted living facility.” Total rip-off.

4. Give your adviser a backdoor way of protecting you. Like most planners, Vivian Honeycutt of Chesapeake, Va., asks her clients for an “incapacity letter.” It allows her to alert a designated person if she notices a mental decline or uncharacteristic spending.

Advisers use this power sparingly. “One of my clients called me to ask if he paid for a cruise with his girlfriend, would that trigger a call to his daughter?” Honeycutt says, laughing. “They’re both 85 and in full possession of their faculties.” He wrote the check and they sailed away.

Ÿ Jane Bryant Quinn is a personal finance expert and author of “Making the Most of Your Money NOW.” She writes regularly for the AARP Bulletin.