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Imagine an older you – and protect yourself

It can be hard to picture yourself older – but doing just that can spur you to plan for your later years.

Take one Stanford study, for example. First, researchers showed students what they would look like at 60. Then, they asked: “If you had $1,000, how much would you save for retirement?”

Those who saw pictures of their older selves said they would save twice as much as those who didn’t.

Just as it’s important to save money for our future selves, it’s also important to plan for the possibility of an older self who can no longer handle her own finances.

In addition to physical changes that occur with age, many people experience cognitive decline, developing Alzheimer’s disease or another form of dementia. In the United States, 22 percent of people age 71 and above have mild cognitive impairment. Once we get into our 80s, our rate of cognitive impairment increases markedly.

As our cognitive abilities decline, so do our financial abilities. A Boston College study showed that we peak at about 53 – after that our financial ability goes steadily downhill. (When I presented on this topic at a recent forum on retirement in Atlanta, I laughed with the audience members who, like me, found themselves on the wrong side of that equation!)

These statistics illustrate exactly why it is important to think about your money and your older self now: when your abilities decline, you’ll need someone to help you handle your finances.

Finding the right person to help you with your money is particularly important because as your abilities decline, you become more vulnerable to frauds, scams, and other kinds of financial exploitation. If you find a trustworthy financial helper, not only will you have someone to help you with your money, but also someone who can help protect you from exploitation by others.

One thing that people are doing to plan for their financial futures is creating a power of attorney for finances. A power of attorney (POA) is a legal document that allows you to designate someone else to act on your behalf – your agent. Creating this legal document is a private way to appoint a substitute financial decision-maker. It’s relatively inexpensive, although you may want to seek help from a lawyer.

If you don’t create a POA before your decision-making ability declines, a friend or family member might have to go to court to have a guardian appointed – often a lengthy, expensive, and uncomfortably public process. Acting now makes it easier on family members later.

Getting a power of attorney does involve some risk. It gives someone else – your agent – a great deal of authority over your finances without regular oversight, which can lead to abuse. Your agent might pressure you for authority that you do not want to grant. Your agent may spend your money on himself rather than for your benefit. Your agent might do things you didn’t authorize him to do – for example, make gifts or change beneficiaries on insurance policies or retirement plans. Also, sometimes scammers forge powers of attorney and use them to take other people’s money.

What are some ways to minimize these risks? You should trust, but verify. Only appoint someone in whom you really have confidence and make sure they know your wishes and preferences. You can also require in your power of attorney document that your agent regularly report to another person on the financial transactions he or she makes on your behalf. Another strategy is to tell other friends, family members, and financial advisers about your power of attorney arrangement so they can look out for you. And remember that power of attorney designations are not written in stone – you can always change or cancel your power of attorney if you decide that your agent is no longer the best person to handle your finances.

Finally, beware of someone who wants to help you out by handling your finances and be your new “best friend.” If an offer of help seems too good to be true, it probably is.

Naomi Karp is a policy analyst in the CFPB’s Office for Older Americans

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