In this article, we explore what diminished financial capacity is, how to spot the warning signs, and what steps to take if you suspect a loved is experiencing cognitive decline.
As our loved ones age, their ability to make sound financial decisions can decline, posing risks to their financial well-being. In fact, a recent Wall Street Journal article asserted that cognitive decline is the biggest financial risk facing Baby Boomers who manage their own nest eggs.
Thus, understanding how to recognize diminished financial capacity in an aging parent or spouse is crucial to safeguarding their assets and ensuring their financial security.
What Is Diminished Financial Capacity?
The Consumer Financial Protection Bureau defines diminished financial capacity as “a decline in a person’s ability to manage money and financial assets to serve his or her best interests, including the inability to understand the consequences of investment decisions.” Often, this is due to age-related cognitive decline, dementia, or other health issues.
Unfortunately, diminished financial capacity can make individuals more susceptible to financial exploitation, poor investment choices, and challenges managing their everyday expenses. Consequently, recognizing the warning signs early is essential to protect your loved one’s financial well-being and overall quality of life.
How to Spot the Signs of Diminished Financial Capacity
There are several warning signs that can indicate diminished financial capacity in an aging parent or spouse. Examples include:
- Forgetfulness. Forgetting to pay bills, deposit checks, or manage financial accounts may be signs of cognitive decline. If you notice your loved one has unopened bills or receives late payment notices, it could indicate a bigger problem.
- Difficulty with simple financial tasks. Struggling with basic financial tasks, such as balancing a checkbook or understanding a bank statement, can be a sign of diminished capacity.
- Confusion about financial matters. If your loved one becomes confused or overwhelmed when discussing financial topics or making decisions, this can be a red flag.
- Uncharacteristic spending. A sudden change in spending habits, such as making large purchases or giving away money without a clear reason, may also suggest a problem.
Financial Elder Abuse: A Growing Concern for Older Adults
One of the most significant risks that often accompanies diminished financial capacity in older adults is the increased potential for financial exploitation. As their cognitive abilities decline, these individuals may be more susceptible to scams, manipulative tactics, or high-pressure sales pitches.
Indeed, financial elder abuse is an alarming and growing issue that affects millions of older adults each year. In fact, the National Council on Aging estimates that victims of financial elder abuse lose at least $36.5 billion annually in aggregate.
Financial abuse can take many forms, including theft, fraud, and coercion. By understanding the connection between diminished financial capacity and financial elder abuse, you can take proactive measures to safeguard your loved one’s financial security.
How to Protect Your Loved Ones If You Spot Signs of Diminished Financial Capacity
Ideally, you can prepare for diminished financial capacity well before you see the warning signs.
If possible, consider having an honest conversation with your aging parent or spouse about the risk of cognitive decline so they can communicate their intentions openly and clearly if they begin to show signs. You may also want to document these intentions with a trusted financial advisor or attorney.
In addition, it may be helpful to make a list of important accounts, documents, and passwords before warning signs appear. These details can be difficult to track down once a loved one starts to decline.
If your aging parent or spouse begins to show signs of diminished financial capacity, the following steps can help you protect them from poor decision-making and financial exploitation:
- Be vigilant. Keep an eye on your loved one’s financial activities and watch for suspicious transactions or changes in spending habits.
- Organize important documents: Ensure that your loved one’s financial documents, such as wills, trusts, and power of attorney, are up-to-date and accessible.
- Maintain open communication. Encourage regular conversations about financial matters and educate your loved one about the common scams targeting seniors.
- Collaborate with professionals: Work with a trusted financial advisor, attorney, or geriatric care manager to put safeguards in place and provide guidance in managing your loved one’s finances.
- Report suspected abuse: If you believe your loved one has been a victim of financial elder abuse, report it to the appropriate authorities, such as Adult Protective Services, local law enforcement, or your state’s attorney general.
Diminished capacity can be a sensitive subject—especially for the person experiencing it. Like most family matters, open and honest communication is often the best approach. Nevertheless, it’s important to take potential warning signs seriously and not dismiss them as normal symptoms of aging.
Benchmark Wealth Management Is Here to Help
Watching a loved one decline can be an emotionally tolling experience for all involved. Unfortunately, it can also have devastating financial consequences for the affected individual. Understanding how to spot the warning signs of diminished financial capacity and taking steps to protect your loved one can help them avoid scams, abuse, and other risky financial decisions.
At Benchmark Wealth Management, we understand the challenges families face when dealing with diminished financial capacity. Our team of fiduciary, fee-only financial advisors can help you navigate these complex issues and create a plan to safeguard your financial future. Schedule a call with us today to learn more about how we can help.
Richard W. Stout III is managing director of Benchmark Wealth Management, LLC, with 25 years of experience in the financial industry. He specializes in financial planning and asset management for individuals, families, and institutions seeking to build and monitor durable and sustainable plans for their financial futures. Rick is a Certified Financial Planner™ professional and holds the Accredited Investment Fiduciary® (AIF®) designation. He obtained his MBA from Rensselaer Polytechnic Institute and his BA in Economics and Anthropology from the University of Connecticut. Rick has earned a Master of Science degree in Personal Financial Planning from the College for Financial Planning. He has extensive background experience in lending, credit review and analysis, and real estate and partnership management. Learn more about Rick by connecting with him on LinkedIn.
Thomas J. Britt is managing director of Benchmark Wealth Management, LLC, with 23 years of experience in the financial industry. He specializes in executive financial planning, retirement planning, investing, as well as the management of trusts and endowments. Thomas is a CERTIFIED FINANCIAL PLANNER™ professional. He holds the Master Planner Advanced StudiesSM, MPAS®, Certified Investment Management Analyst® (CIMA®), and Chartered Retirement Planning Counselor℠, CRPC® designations. Thomas earned a Bachelor of Science in Finance from the University of New Haven, an MBA in financial technology from Rensselaer Polytechnic Institute, and a Master of Science in Personal Financial Planning from the College for Financial Planning. He is also a proud veteran of the United States Navy Submarine Force. Learn more about Tom by connecting with him on LinkedIn.
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