Why Making Big Decisions At Older Ages Is So Risky

By: Olivia S. Mitchell
Olivia S. Mitchell (@OS_Mitchell) is a professor of insurance/risk management and business economics/policy at the Wharton School of the University of Pennsylvania.

Every single day from now until 2030, about 10,000 Baby Boomers turn 65. While this doesn’t mean we become instantly feeble on our birthday, it does mean that we must start planning ahead for things that will be much more difficult to handle later. Unfortunately, too many of us avoid thinking about tomorrow, with potentially dangerous and certainly undesirable consequences.

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For instance, while most Americans believe their family members should help make medical decisions in the case of a terminal illness, only about a quarter of us has an advance directive such as a living will. This is a document instructing our children and other caregivers about how we want them to handle our medical emergencies. Additionally, only about 12% of the older population buys long-term care insurance, though 70% of people over age 65 will eventually require personal support services in later life.

How Patient Are Older People?

One reason that older people don’t plan ahead, according to our recent study, is that cognitive functioning becomes increasingly difficult the older we get. In particular, many people have a harder time making decisions that have important future consequences.

We investigated this issue using a nationally representative survey of older persons age 70+ in the Health and Retirement Study (HRS). Our approach asked respondents to evaluate hypothetical choices comparing payments now with payments one year in the future. For example, one question was as follows:

“Suppose you were given the choice between receiving a payment today or a payment in 12 months. Would you rather receive 100 dollars today or 154 dollars in 12 months?”

If someone preferred the larger, later sum, we then asked a follow-up question using a smaller amount for the delayed payment:

“Would you rather receive 100 dollars today or 125 dollars in 12 months?”

Based on peoples’ answers, we then computed the interest rate making each person indifferent between the smaller, sooner, versus the larger, later payment. This we call the discount rate, and it indicated which respondents are impatient versus patient.

There is a wide dispersion in older peoples’ degree of impatience. The mean of 0.54 implies that, on average, $1 today is seen as equivalent to $1.85 a year from now (1.85=1/0.54). Not only is this much higher than previously found for younger people, but it also rises with age. We also found that better-educated people tend to be more patient, but people suffering mental shortfalls are substantially more impatient.

Is Impatience Related to Behavior at Older Ages?

Next we explored whether these revealed impatience levels are associated with important life decisions confronting the older respondents. What we found was, first, that impatient people also have saved much less money over their lifetimes.  Second, the impatient engage in many fewer healthy behaviors, including having had a flu shot, and (for women) had a mammogram/Pap smear or (for men) a prostate test; avoiding smoking, and having less than 1 drink per day.

Finally, we asked whether the most impatient are also less likely take precautions around their end-of-life challenges. This is important for the older population as well as their children and caregivers, who will often need to make difficult decisions without much guidance. Moreover, it is important for taxpayers as a whole, as in the United States, 85% of end of life care costs are covered by government agencies, and one-quarter of Medicare spending is devoted to patients in their last years of life.

Strikingly, our research shows that the least patient people also make little provision for end-of-life challenges. In particular, they are less likely to have long-term care insurance, a power of attorney, a living will, and discuss end of life medical care plans with others.

The Takeaways

As the US population ages, many more of us will become both caregivers and care recipients. Understanding this, some advance planning can greatly improve the “third half of our lives” – for ourselves and our loved ones. As Benjamin Franklin said, “He that can have patience can have what he will.” So overcome impatience and take just a few minutes to set up an advanced directive and – as Ben said, a will! These can save you and your family heartache, time, and probably, money, and bring peace of mind for all.

This article first appeared as an article in the Wall Street Journal Wealth Management section, Feb, 8, 2018. See https://blogs.wsj.com/experts/2018/02/08/why-making-big-decisions-as-we-get-older-is-so-risky/

Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.