Why our financial capabilities peak at 53

I came across an interesting book about how our financial capabilities start to decline quite early and what we should do about it. The book is called What to do when I get stupid and it’s by an American economist, Lewis Mandell. Here is an overview of Mandell’s findings with my thoughts interspersed.

Mandell cites a plethora of scientific studies that suggest our ability to make financial decisions peaks around age 53.

He first distinguishes between “fluid intelligence” and “crystallized intelligence”.

Fluid intelligence is the ability to think abstractly and process complex information. Psychologists have long known that fluid intelligence peaks around age 20 and declines by 1% each year thereafter. This is why great mathematical discoveries tend to be made by young researchers, for example.

However, as we age, we also gain experience to help us make better decisions. This is called crystallized intelligence. So, while fluid intelligence decreases with age, crystallized intelligence increases:

“Since fluid intelligence declines at a slow but steady rate, overall intelligence will tend to increase at first, spurred by the relatively rapid increase in crystallized intelligence, but then begins to slow in middle age. The steady loss of fluid intelligence begins to match smaller and smaller increases in crystallized intelligence, until the increases and decreases are equal, at which point our overall intelligence peaks.”

When you combine the two types of intelligence and apply them to financial decisions, research indicates that we peak around age 53 and then decline at a rapid rate. The age of maximum performance varies according to the different financial products, from a minimum of 45.8 years to a maximum of 61.8 years.

Borrowing and debt decisions peak around age 53, while investment skills peak around age 70. The difference is likely due to the different ages at which we gain experience with borrowing and investing. When you’re young, you don’t have a lot of money and so you go into debt to finance a house, for example. As we get older, and perhaps thinking about retirement, we are more likely to have accumulated assets and are more open to learning about investing.

prepare now

Only a small number of us will reach 80 without some sort of mental impairment that will cloud our financial decision making. But our self-confidence in our financial decisions increase with age. Older investors are more likely to use new investment information from television and newspapers, but they are less adept at using this information and are more likely to raise the risk profile of their investments as a result.

Mandell thinks it’s wise for us to offload financial decision-making while we still have the mental capacity to do so. He believes that planning is key to ensuring that we will have enough income each month for the rest of our lives to maintain our desired standard of living.

He advocates a guaranteed income that should be regular, virtually impossible to lose, and should increase as our expenses rise with inflation. And it should last no matter how long we live.

Threats to this planning include low interest rates, stock market volatility, rising inflation, and to ourselves if we rely on our own decisions as our faculties age.

The best strategy

The goal is to have enough money each year to cover our basic retirement expenses. Beyond that, any additional income is discretionary. These are surplus assets that can be used to increase our standard of living.

If annual income is not enough to cover retirement expenses, you have two choices: 1) reduce our standard of living or 2) bet on risky assets to make up the shortfall. Many people opt for 2).

Mandell explains how to calculate basic retirement expenses, including identifying those that will rise with inflation.

Much of his solutions to the problem are centered on the United States. Generally speaking, however, he suggests a combination of fixed annuities and Treasury inflation-protected securities (TIPS).

First, he likes fixed annuities where you put in a sum of money and get a fixed monthly payment for life. By doing this you: 1) eliminate market risk 2) since these annuities pay for the rest of our lives, they eliminate longevity risk and 3) since they cannot be cashed in, they eliminate judgment risk.

He thinks TIPs are a useful hedge against inflation. An additional strategy to reduce the impact of inflation is to try to pay down debt and rent for free. And owning a low-maintenance house and car is also important.

The book looks at ways to protect assets against irrational judgments you might make. This includes such things in joint accounts, asset sharing, etc.

If you manage your own investments, there is little legal protection against irrational decisions that might be made in the future.


The statistics on declining financial capability may have surprised you, as it did me. Of course, in Australia we have a generous superannuation and pension system, both of which help fund our pensions. Nonetheless, it’s worth considering at least Mandell’s point of automating much of our financial decision-making before our cognitive abilities begin to decline.

James Gruber is associate editor at Firstlinks and Morningstar.

Carol N. Valencia