Planning to Be Mentally Infirm in Retirement
18 September 2006Yahoo Finance has a regular column by Ben Stein (Ferris Bueller’s teacher), and in this article he raises a very good point - you might want to think about structuring your investments in retirement so that they don’t need to be actively managed. Why?
I would also add this stray thought: Many critics dump on variable annuities, and it’s true that some of them are too expensive. But imagine yourself old and ill, and too distracted to make intelligent investment decisions (as if any of us can do that even in our prime).
Wouldn’t it be nice to get a sizable check every month that will never stop coming? One that doesn’t depend on your mental agility? Or on market conditions? It sure appeals to me, and as long as you buy your variable annuities carefully and make sure you know what all the fees are for, it should to you, too.
Now, I’ll admit that the stray thought here is about all that I liked out of the article. Ben Stein’s a smart guy, but he’s got a real bent towards dystopian futurism in his columns - believing that the U.S. is headed for a serious economic collapse, while other countries will ascend to take over our role. I don’t see that happening anytime soon - other countries are growing by shifting into areas the U.S. economy has outgrown, and they won’t be competing with us in technological development anytime soon. He cites rational expectations theory in the context of people saving to pay for health care after a Medicare budget crisis, stating that people tend to see a problem and act to avoid it. Yet he doesn’t acknowledge that the same theory would predict that the government or the voters would see that crisis and act to reduce Medicare liabilities by cutting benefits before it happened. The advice to invest in Russia, a corrupt near-dictatorship, seems to me to be lunacy - Cuba and Venuzuela have lots of resources too, but investing there hasn’t proven to be too smart.
But he does have this one good point: when you’re planning to retire, you can’t assume that you’ll be as mentally able as you are today. Lots of investments out there require you to actively manage them. Take real estate, for example - owning rental properties is a great investment, and a pretty passive one. But you still have to make decisions, even if you’ve got a property management company. Big expenses can come up - someone has to authorize that new roof after a hailstorm. Stocks can be the same way - if you own individual stocks, you have to decide when to sell them, and what else to buy.
The problem is that many people end up losing some mental function as they get older. Take Alzheimer’s, for example - this is probably the most well-known mental disease affecting the elderly. And it’s extremely common - one in ten people over the age of 65 has it, and HALF of the people over 85 have it. Not all these people have the severe symptoms you are probably thinking about - but even losing some memory function or not thinking as quickly as you used to can affect your ability to make wise investments. You may forget to send that mortgage payment you owe on your rent house. You may read the numbers wrong on the newspaper report on the company you own stock in. Maybe you let your insurance policy lapse on accident. There are lots of ways the gradual decline of old age can hurt you financially if your investments are set up to require active management. So what do you do about it?
1) Nothing until you get very near retirement. People who are young and still can actively manage their finances should - you shouldn’t give up returns on stocks to put your money in an annuity when you’re 40. This is a problem that is unlikely to hit you with any severity before you turn 65 - and if it is, you probably have advance warning because of other family members that have suffered.
2) When you near retirement age, start moving money into investments that do not require active management. What kinds of investments are these? You could stick your money into a bond fund that will be managed by someone else and has a long history of making regular payments. Annuities are good ideas, as Ben Stein points out - you can’t do anything to ruin them as an investment even if you do lose your mental agility, because the money isn’t in your hands. Consider putting some assets into a trust that you don’t control. And if you’re into real estate, you should probably start selling the properties. One hint for this: a good way to do it is to sell them to your kids. They’re younger, they can manage them, and you can act as the “bank” and have them pay a mortgage to you each month. You get a little less money, a lot less hassle, and you can avoid some estate taxes that way (your kids will get the growth in dollar value of the properties). On the other hand, you have to be able to trust them - deadbeat family members have been known to take advantage of this kind of thing.
3) Don’t be stubborn about it. I’m talking to the guys here most of all. Men tend to react to medical issues by pretending they don’t exist. That’s another reason it’s good to start these asset shifts in advance - to a man, giving up control is like acknowledging that you’re getting weaker. Do it when you’re 63, and still in full health, and that’s not an issue. You’re planning for what might happen - not admitting mental weakness. If you wait, your attitude might shift, and you might cling to control when you shouldn’t.
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