With the shift from defined benefit pensions to 401(k) plans, the welfare of retirees increasingly depends on their ability to make sound financial decisions. This situation has raised concerns that the cognitive decline that comes with age could compromise the elderly's decision-making ability and thereby their financial well-being. This brief, based on a recent study, addresses this issue using a unique dataset that follows a group of elderly individuals over time. The discussion proceeds as follows. The first section reviews the literature. The second section describes the dataset and the sample used in the study. The third section estimates the effect of declining cognition on three aspects of financial decision making: financial literacy, confidence in the individuals' ability to make financial decisions, and responsibility for managing the individuals' finances. The final section concludes that declining cognition has a noticeable adverse effect on financial literacy, but not on individuals' confidence in managing their finances. Perhaps not surprisingly then, more than half of those experiencing a significant cognitive decline retain primary responsibility for managing their finances.
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