En español | Many seniors make sure they have a durable medical power of attorney to carry out their wishes when they can no longer direct health care providers. But only 39 percent have given any sort of power of attorney to protect their money. While we've all heard horror stories about fraud or huge financial mistakes made because of cognitive decline, we don't think it will happen to us. But you never know, and it’s always best to be prepared.
To help you prepare, there is the six-step Thinking Ahead Roadmap, created by the Stanford Center on Longevity and the University of Minnesota and funded, in part, by AARP. These six steps will bring you the peace of mind, confidence and sense of relief that comes with feeling prepared for the future.
Step 1: Choose a trusted advocate.
This is often your spouse, but you should have a backup as well, since your spouse is likely about the same age as you. Your advocate should be someone who can do things like manage your day-to-day expenses, oversee your investments, store your financial records and protect you from scams. Look for someone who is trustworthy, well organized and good with money. The coauthor of the Roadmap, Steve Vernon, told me it's fine to have more than one advocate. If you have two children, for example, you could have one pay the bills and another manage your investments. If you don't have children, consider a younger relative or a good friend you know you can trust.
Step 2: Organize your financial information.
Start by creating a financial inventory that includes any assets you own and any debt you owe. List your income, including Social Security or a pension. Then make a list of the bills you pay regularly, such as utilities, loan payments and subscriptions. It's important to have a list of all your passwords that you keep in a safe place. Then try to simplify — do you really need all of those accounts? Do your advocate a favor and declutter your finances.
Step 3: Start a conversation with your prospective advocate.
You could begin by saying something like: “I really respect your work ethic and how well you've done with your own finances. That's why I'd like to ask if you'd be willing to help me manage my money if it ever becomes too tough for me to do on my own."
Tell your advocate that you're fine, that you're just preparing for a future possibility where someone may need to step in. It could take some time for your advocate to process what it might mean to assume this role for you — or if they even want to. So if they seem a bit taken aback or resistant, let them know that it's fine to think about it and that you can pick up the conversation later.
Step 4: Explain your future money needs and expectations.
Walk your advocate through the financial inventory you created in Step 2. Let your advocate know what's important to you, such as continuing to contribute to a charity you believe in. Put everything in writing so your advocate will be able to refer to it in the future.
Step 5: Make it official.
Your financial institutions won't just give access to your advocate and allow her to manage your assets without the legal authority to do so. Much as with the durable medical power of attorney, you'll have to complete some paperwork to legally appoint your advocate. This is known as a financial power of attorney. More detail about how to set this up can be found in the Thinking Ahead Roadmap. It's important to understand that this power of attorney will terminate when you pass away. That's where the executor of your estate takes over. You can decide whether or not that should be the same person.
Step 6: Gradually shift money management.
The Roadmap's first five steps will prepare for a possible scenario where you need your advocate to manage your money. Knowing when the time is right for your advocate to step in is a whole different matter. The Roadmap lists some signs to watch for. These can be obvious, such as being diagnosed with dementia. But there can also be more subtle signs, such as forgetting to pay bills on time or having trouble doing business over the phone or on your computer.
Handing over control of your financial affairs is a difficult step. Ask your advocate and others to watch out for some of the warning signs of dementia. You may even want to write a letter to your advocate — include a copy for yourself — noting the specific circumstances that will signal it's time to turn over financial management.
Summing it up
Preparing for a decline in either our physical or mental health can be a depressing endeavor. But following the Thinking Ahead Roadmap can protect you and your family members and bring you a peace of mind that allows you to enjoy life and worry less about money. Even if you already have a financial power of attorney, spending a little time reviewing the Roadmap will provide valuable guidance to help you keep your finances running smoothly.
Allan Roth is a practicing financial planner who has taught finance and behavioral finance at three universities and has written for national publications including The Wall Street Journal. Despite his many credentials (CFP, CPA, MBA), he remains confident that he can still keep investing simple.