There are many connections between financial literacy, which means “the ability to understand and use various financial skills, including personal financial management, budgeting, and investing,” and brain or cognitive health. Research is beginning to shed some light on these connections.

Boyle et al. (2013) suggested that financial literacy is particularly a problem among adults over the age of 65, resulting partly from declines in basic cognitive abilities such as episodic memory capacity (the conscious recollection of previous experiences) and executive functioning. When the information load and computational demands of a task are high, age-linked attentional and working memory constraints lead to diminished executive functioning. Working memory is important because it involves not only being able to store information for a brief period of time but also the ability to mentally manipulate that information.

Using a large sample of older respondents, Finke et al. (2011) tested whether knowledge of basic concepts essential to effective financial choice declines with age and found a consistent linear decline in financial literacy score of about 2% each year after age 60. A separate analysis using data that included measures of cognitive ability suggested that a natural decline in both fluid and crystallized intelligence in old age contributed to falling financial literacy scores. Fluid abilities involve comprehension, reasoning and problem solving; fluid intelligence tends to decline during late adulthood. Crystallized abilities involve recalling stored knowledge and past experiences, and though these often do not decline with age, they would be impacted by a decline in episodic memory.

A study entitled “Confidence in Financial Literacy and Cognitive Health in Older Persons” used data from 974 community-dwelling older adults participating in the Rush Memory and Aging Project. Participants were an average 81.2 years old with 15 years of education; about 75% were female (Yu et al., 2020). The study found that confidence in financial knowledge is associated with a decreased risk of Alzheimer’s dementia among older persons, while under-confidence suggests a greater risk of developing Alzheimer’s dementia and experiencing a faster cognitive decline. It was suggested that this relationship may occur because confident people are motivated to engage with the world and actively seek to acquire new information, and research shows that continued learning and cognitive stimulation help to build cognitive reserve, which strengthens brain health.

A separate FINRA Investor Education Foundation/Rush University Medical Center study examined connections between financial and health knowledge found that a faster decline in financial and health literacy was associated with three different outcomes: poorer decision making, higher susceptibility to scams, and lower psychological well-being.

Older adults, and especially those with Alzheimer’s disease and other cognitive disorders, are often easy targets for financial exploitation. This is the most common form of elder abuse, accounting for about half of cases. Factors that can contribute to financial vulnerability among older adults include cognitive or emotional decline; impairments in vision, hearing or mobility; serious progressive illness; and social isolation. Certain diseases and medications can also hasten cognitive decline and make it more difficult for older adults to manage their money. According to a 2011 MetLife study, older adults lose at least $2.9 billion per year to scams, fraud, theft, and other misdeeds. A 2016 survey by Investor Protection Trust, a nonprofit devoted to investor education, shows that 17 percent of people aged 65 or older have been taken advantage of financially.

Often one of the earliest clinical signs of emerging dementia is financial impairment, says Dr. Eric Widera, a geriatrics specialist at UCSF. Financial capacity is necessary for living independently. It encompasses relatively simple tasks, such as counting change and paying bills, as well as more complex activities, such as balancing a checkbook and making investment decisions. These tasks require cognitive functions that include attention, executive function, memory, math skills, and judgment. Like other functional skills, financial capacity is not lost all at once, but diminishes gradually as Alzheimer’s progresses and cognition – the ability to think, learn, and remember – declines.

Recently scientists have studied older adults without dementia to identify and measure the brain’s role in various aspects of financial ability, and to possibly predict who may be on the path to reduced capacity. Results suggest that even cognitively normal older adults may be at risk for poor financial decision-making in some circumstances. MRI scans can reveal how changes in brain structure and connectivity affect functional changes in everyday life. For example, when a person has trouble reading a bank statement, an MRI may reveal aspects of brain structure associated with that specific trouble. In the same way that neuroimaging is used as a biomarker for early Alzheimer’s disease, researchers may be able to use MRIs to develop biomarkers for impaired financial decision making, according to Duke Han, Ph.D., of USC. He hopes that scientists might be able to find ways to strengthen the brain to keep older adults functioning better, so they are less likely to become victims of financial abuse.

In summary, because financial decisions can have a significant impact on an older adult’s quality of life, it is important for individuals and their financial advisors to be aware of declines in financial literacy as well as in basic cognitive functions.