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https://www.wsj.com/personal-finance/the-exact-age-when-you-make-your-best-financial-decisions-2a8163bb

 1. Personal Finance
    
    --------------------------------------------------------------------------------

 2. Turning Points


THE EXACT AGE WHEN YOU MAKE YOUR BEST FINANCIAL DECISIONS


THERE’S A MAGIC NUMBER FOR WHEN YOUR EXPERTISE AND COGNITIVE POWERS ALIGN


PHOTO ILLUSTRATION BY ELENA SCOTTI/THE WALL STREET JOURNAL; ISTOCK (2)
By Clare Ansberry

Aug. 26, 2023 9:00 pm ET
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The prime years for making smart financial decisions are, on average, 53 and 54.

At around that age, people have accumulated knowledge and experience about
money, spending and saving, but haven’t begun losing key analytic cognitive
skills. It’s also roughly the age when adults make the fewest financial
mistakes, related to things like credit-card use, interest rates and fees.

Knowing what leads to the financial strength of your early 50s is valuable.
Younger adults can delve more deeply into basics like inflation and interest
rates to hedge against lack of experience, and those who are older can work to
keep their analytical skills sharp. 


EARLY TAKE


MAIN REASONS CITED FOR EARLY WITHDRAWAL FROM A RETIREMENT ACCOUNT


Future concerns

27%

Immediate concerns

59

Saving

protection

4

Money today

2

Other

9

Future

concerns

Immediate concerns

59

27%

Saving

protection

4

Money today

2

Other

9

Source: Arc Centre of Excellence in Population Ageing Research, 2022, ‘Financial
Decision Making for and in Old Age’


“As we get older, we seem to rely more on past experience, rules of thumb, and
intuitive knowledge about which products or strategies are better,” says Rafal
Chomik, an economist in Australia at the ARC Centre of Excellence in Population
Ageing Research.

Chomik led a 2022 study that looked at financial literacy, which is the ability
to understand financial information and apply it to managing personal finances.
Financial literacy typically peaks at age 54 and then declines, according to the
study. 

The study gauged financial literacy using questions about inflation, interest
rates and diversification. One question: If in five years, your income has
doubled and prices have doubled, will you be able to buy (A) less, (B) the same,
(C) more than today. (Answer: B)

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People can—and do—make good financial decisions from their 20s to their 40s, as
well as into their 60s and 70s. Chomik, who is 45, says some of his best
financial decisions came earlier in his life and involved his 401(k)-type
savings account. Contributions were mandatory when he started his first job at
around age 18, but once enrolled, he actively chose funds that benefit those who
have a longer investment horizon.

Financial decision-making requires a combination of reasoning skills that differ
by age. Those in their 20s are better at absorbing and processing new
information and computing numbers—so-called fluid intelligence—but don’t have as
much life experience or crystallized intelligence—the accumulation of facts and
knowledge. Crystallized intelligence tends to improve with age.


GETTING HELP

Beverly Miller, a financial coach who often works with people who are in debt,
says she did most things right before her 50s, avoiding credit-card debt, paying
off car loans and paying off a 30-year mortgage in 12 years. 

Beverly Miller enlisted a certified financial planner to help with investments
when she was in her 50s and calls it one of her best financial decisions. 
Photo: John Miller

But she didn’t invest as wisely as she could have. For example, she moved money
in a retirement savings account out of growth funds and into fixed-income
funds. 

“We would let market changes scare us into making changes we shouldn’t have,”
says Miller, 65. 

Miller says she and her husband could have made more money if they had left it
in growth funds. Likewise, she invested in rental properties, which she thought
could be an easy source of income but weren’t.

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It wasn’t until she was in her 50s that she and her husband finally turned to a
certified financial planner to help with investments, she says. 

“In your 50s, you have enough maturity and experience to know you need help,”
says Miller.


AGE OF REASON

People make financial mistakes at any and every age, but they made fewer
mistakes at the age of 53, according to economic researchers. In one study,
economists looked at financial choices made by adults in 10 financial areas,
including home-equity loans, lines of credit, mortgages and credit cards, and
how those decisions affected fees and interest payments.


OPTIMAL TIME


AGE AT WHICH FINANCIAL MISTAKES ARE MINIMIZED FOR EACH CASE STUDY


Eureka moment*

45.8 years

Auto loans

49.6

Credit card

50.3

Credit card late fee

51.9

Home equity lines

53.3

Credit card over limit fee

54.0

Credit card cash advance fee

54.8

Home equity loans

55.9

Mortgage

56.0

Small business credit card

61.8

Eureka moment*

45.8 years

Auto loans

49.6

Credit card

50.3

Credit card late fee

51.9

Home equity lines

53.3

Credit card over limit fee

54.0

Credit card cash advance fee

54.8

55.9

Home equity loans

Mortgage

56.0

Small business credit card

61.8

*Point when people adopt the optimal strategy involving balances and purchases
on credit cards.


Source: Sumit Agarwal et al, 2009, ‘The Age of Reason: Financial Decisions over
the Life Cycle and Implications for Regulation’


Fees and interest payments, across all 10 areas, are at their lowest levels
around age 53, according to the 2009 study in the Brookings Papers on Economic
Activity. That age was referred to as the “age of reason,” or the point at which
financial mistakes are minimized. A financial mistake would include
overestimating the value of a house, for instance.

At the age of 53, “people have been dealing with financial markets for years and
know how to look for the right financial product, and minimize fees and
payments,” says Sumit Agarwal, a professor of finance at the National University
of Singapore and an author of the study.

Agarwal turned 53 this year.

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“I have a lot of experience capital right now,” he says. “Going forward, I will
be making more mistakes and will be slower making decisions.” People can keep
their analytical skills strong and continue to make good decisions by reading
and exercising the brain, he says.

One financial mistake 50-year-olds tend to make involves underestimating their
life expectancy, which can lead to flawed planning decisions about retirement. A
typical 50-year-old expects to live until age 76, when actuarial estimates have
that person living another decade to age 86, according to Chomik’s study, which
looked at surveys in Australia. A 2020 study in the U.S. found that 28% of
adults 50 and older underestimated their life expectancy by at least five
years. 

SHARE YOUR THOUGHTS

How have you seen your decision-making regarding financial alternatives and
strategies change as you age? Join the conversation below.

Kristen Jacks, a 55-year-old financial educator based in New Haven, Conn., says
people in their 50s have often experienced enough financial pain to make them
more acutely aware of the need to weigh all financial alternatives carefully and
avoid mistakes.  

“You’re also at the age when you look at your retirement savings and realize
you’re running out of years to make it bigger,” says Jacks. 

She also works with younger people who can underspend as well as overspend. One
young man in his 20s, she says, earned good money as a traveling nurse but was
living in a small $600 a month apartment that he hated.

She says her own best financial decisions are lifelong habits. Jacks, who bought
a $1,500 certificate of deposit when she was 15 using babysitting money, doesn’t
accumulate credit-card debt and lives below her means. 

“You do that for 20-plus years, and you are so much better off,” she says.

Write to Clare Ansberry at clare.ansberry@wsj.com


HOW TO RETIRE BETTER

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How to Leave Your Heirs An Inheritance—Not a Huge Tax Bill
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Copyright ©2023 Dow Jones & Company, Inc. All Rights Reserved.
87990cbe856818d5eddac44c7b1cdeb8

Appeared in the August 29, 2023, print edition as 'Early 50s Are the Golden Age
For Making Financial Decisions'.

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