Q&A with 'What to Do When I Get Stupid' author Lewis Mandell
A behavioral economist on how to protect yourself from bad decisions in old age
We're late learning our financial ABCs and then in old age
we forget what we've learned, says behavioral economist Lewis Mandell.
his career, Mandell preached that young people weren't mastering personal finance.
As he approached retirement, he turned his studies and research to people his
own age and older. The conclusion: Financial wisdom peaks in the 50s and then
declines steeply, making seniors more vulnerable to bad decisions.
But we're not all doomed to be doddering idiots losing our
nest eggs to greedy second spouses and kids, unscrupulous advisers and our own
financial ineptness, Mandell says. We can take action now to protect ourselves
in our dotage.
LEWIS MANDELL, AUTHOR,
'WHAT TO DO WHEN I GET STUPID'
In "What to Do When I Get Stupid," behavioral economist Lewis Mandell explains how our ability to make sound financial decisions declines with age -- and what we can do to protect ourselves.
Besides his latest, Mandell has written three books about credit cards: "Credit Card Use in the United States," "Bank Cards" (with Neil Murphy) and "The Credit Card Industry -- A History."
Mandell, professor emeritus of finance and managerial
economics, and former dean of business at State University of New York at
Buffalo, took inspiration from his own parents. "My parents retired and went
through some of the worst times in the economy -- very high inflation and
recessionary times," he says. "Without having a huge amount of income coming
in, they kept saving more and more money. They weren't huge penny pinchers. I
asked 'How is this possible?' I started writing a book about them."
He widened his approach beyond his own parents and in his
new book, "What to Do When I Get Stupid," Mandell describes how and why you
should take action now while you still have your financial wits about you to
protect yourself from others and your own bad decisions as you age.
Q: How was it possible for your parents to save?
A: They own their own age-in-place home. They have no debt.
Q: Why is an age-in place home important?
A: If you have not prepared for your older age by
having a master suite on the ground floor and no stairs to get in and out of
your house, you're asking for trouble. People often have to go into nursing
homes or assisted care because they couldn't get into their bedroom because it
was upstairs. If your home is totally paid for, then what you really need to live
on in retirement becomes minimized.
Q: What advice would you offer retirees regarding
credit cards and debt?
A: In my new book, I stress the importance of
safety for retired persons who wish to maintain their standard of living for
the rest of their lives. Being debt-free, if possible, is an
important component of safety.
However, in my three previous books on credit cards, I
stress the difference between the transaction use of credit and the debt use of
credit, which is important here. Pure transactors, who have the ability
and willingness to pay off credit card balances each month, can safely use
credit cards for their convenience value, particularly when traveling. I would
caution retired temporary or permanent revolvers against the use of credit
cards and encourage them to use debit cards instead to avoid finance charges as
well as the inadvertent build-up of leverage that can work against them.
Q: What else contributed to your decision to write
A: I had a good friend who asked me about getting
an annuity. I said, 'That's a dumb idea. Why in the world would you want an
annuity now? Didn't you sit in on my seminars?' Then my friend said, 'What
happens when I get stupid?' I realized that maybe we should consider putting
our finances on automatic so we can't screw up on our own financial situation
for ourselves and our loved ones. I decided to lead off with very good research
being done on diminishing financial cognition. Then, I focus on how do we deal
with it while we're still cognitive.
Q: You say in your book that
cognitive ability related to credit cards and borrowing peaks around age 53,
but investment skills don't peak until age 70. Why the difference?
A: As I say in the book, the fact that
investment skills tend to peak some 16 to 17 years later than borrowing
skills is probably due to the differing ages at which we gain experience
in borrowing and investing. When we're young and don't have that
much money, we're forced to learn how to borrow in order to finance many of the
things that we need, including education, cars and homes. When we're
older, at or near retirement, we don't need to borrow so much but finally have
some assets accumulated for our retirement. It is at this age that many of us
begin to pay attention to the financial news, attend legitimate financial
seminars, and really begin to learn something about our investments. Therefore,
our borrowing skills start to build early in life, in our 20s and early 30s, while
our investment skills tend to build much later, often in our 50s and beyond.
Our borrowing skills start to build early in life, in our 20s and early 30s, while
our investment skills tend to build much later, often in our 50s and beyond.
Q: What could happen to people as they continue to
make financial decisions as their financial capabilities decline?
A: On the benign end: I forgot to deposit this
check. It could be we've gotten notification of a class-action suit because of
bad deeds of a company we've done business with and we haven't bothered to fill
out the forms. On the less benign end, you may make a decision based on
advertising where a few years ago you would have said, 'This is stupid.'
Q: Are most people willing to admit their financial
abilities might decline?
A: Self-sabotage is something most people don't
think about. They think, 'This could happen to other folks.' They've observed
it with people they know. But the research shows that as you get older, not
only do you become less competent to understand complex things -- you also
become more convinced of your ability in this area.
Q: Back to the annuity: Did you change your mind and if so,
A: Not having really studied the matter, I thought
that buying an annuity when market interest rates were low meant sacrificing a
lifetime cash flow. When I actually crunched the numbers, I found that a
doubling of interest rates from 1 percent to 2 percent would affect annual
annuity payments by very little -- just 7.3 percent for a 70-year-old man
Q: Why do people need annuities?
A: The greatest risk is living too long. That's why we all need
annuities -- we all know people who live to be 100. But fewer than 1 percent of
people have an annuity. Economists who study this call it 'the annuity puzzle.'
Research shows that as you get older, not only do you become less competent to understand complex things -- you also become more convinced of your ability in this area.
Q: What kind of annuity do you recommend and why?
A: Like most economists, I like an immediate (or
deferred) single payment fixed annuity from a highly rated insurance company
that will pay the greatest monthly amount per dollar invested. Variable
annuities tend to have less certain returns and generally have higher fees and
selling costs associated with them. What people regard as the disadvantage of
single payment annuities, I regard as one of the biggest advantages -- the
inability to cash it in. That's money you can never be cheated out of.
Q: What is the most important takeaway from your
A: The single most important thing you can do is
delay taking your Social Security until you turn 70. Not only
does Social Security give you an 8 percent return for every year you wait, that
8 percent is a real rate of return that's protected against inflation. No one
else is giving you a real rate of 8 percent. The single best annuity is Social
Security because it not only pays you as long as you're alive, but it also adjusts
to the cost of living.
Q: What about the fear that Social Security will collapse?
A: I spend a lot of time talking with people who are connected
with Social Security. Social Security is not going to go out with a bang. It's
going to decline with a whimper. There are still so many ways to fix Social
Security so it will still be around. The most likely fix is raising the age at
which you get your full Social Security benefits. I feel the age will be
extended. But people will be given sufficient warning.
See related: Keeping your credit score high in retirement
, 2 do's and 8 don'ts for boomers planning retirement
, 'Pay yourself first' method can force you to save
Published: September 12, 2013