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A few studies have pegged the mid-50s as the point at which the quality of our financial decision-making peaks. Unfortunately, this zenith of our financial prowess appears to occur both before, and after, it is most needed.

In terms of the number of poor choices we make, there is a U-shaped pattern over our lives. We make more mistakes early on with things like paying bills on time and paying more interest on loans than we should because we don’t have much experience with managing money.

But over time we learn from our earlier choices and grow in financial confidence as we make more decisions. Our error rate declines until our mid-50s, after which it increases as our brains start to fail us.

The effect of the larger, more frequent errors we make early in our lives are magnified because they happen at a time when we are building a financial foundation for the future. The cost of waiting to start a long-term savings habit is particularly painful in hindsight when we think about the effects of not starting 10 or 20 years earlier than we did. The most harmful error is missing out on the benefit of compound interest.

A good example to demonstrate the power of compound interest is to look at a pair of twins, one starting to invest at 18, and the other delaying their start for 10 years until age 28. If they could each manage a 7-per-cent rate of return, and assuming a contribution of $100 per month, the one who started at 18 could stop contributing at 28 and still end up with more money at 65 than the sibling who waited until 28 and continued to contribute for the next 37 years.

These types of examples use a lot of simplifying assumptions, such as the ability to get a consistent annual return and that the delayed twin didn’t increase their contribution rate over time. But when it comes to motivational examples for saving – the simpler, the better. And they are motivating if you are young, but demoralizing if you are not.

The cost of mismanaging our cash flow and racking up double-digit interest charges on credit cards is not only painful in the moment, but notoriously difficult to break free from. Insidiously, some people will fall into a perpetual cycle of running moderate, constant credit card balances, while those who get to their financial breaking point might be more motivated to turn it around for good. In either case, being just a bit too reckless with our spending early on snowballs into another delayed start for any financial freedom down the road.

With the benefit of experience and knowledge gained we might look back with some regret at 53 over what could have been, had we taken action just a little bit sooner. It’s especially poignant as we start to realize that retirement is potentially around the corner.

For the 20 years up to 2019, the proportion of private-sector pension plan members with the gold-standard defined-benefit plans decreased from 85 per cent to 39 per cent. (The decline for the public sector was only from 98 per cent to 91 per cent.)

Responsibility for retirement security has slowly shifted toward the individual. Couple this with the cognitive decline that leads to more financial errors after our mid-50s, along with increased lifespans, and the weight of these realities is clear. The stakes are higher.

For the young, the lesson is straightforward: start now. The power of time and compound interest is on your side. For the older generation, it’s crucial to recognize the challenges that come with age. Open communication with family and trusted advisers can help navigate the complexities of financial decisions as cognitive abilities evolve.

Denying the inevitable won’t serve us; instead, embracing it and planning accordingly will. In a shifting financial landscape, proactive steps and collaboration are our best allies.

Preet Banerjee is a consultant to the wealth management industry with a focus on commercial applications of behavioural finance research.

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