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Personal Finance

Financial Planning for Diminished Capacity

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Aging and illness can change many things in a person's life, including the ability to manage one's own money. One key tip for how to prepare for your financial future: Hope for the best, but plan for the worst.

"Diminished financial capacity" is a decline in a person's ability to manage money and financial assets to serve their best interests, including the inability to understand the consequences of investment decisions. When people of any age lose the capability to manage their finances, they may also become more vulnerable to investment fraud and other forms of financial abuse.

These five steps can help you prepare in the event that diminished financial capacity becomes a serious problem for you or your loved ones.

1. Organize your important financial documents. Store your financial documents in a safe, easily accessible location. Give copies to trusted loved ones or let them know where to find them.

When it comes to bank and brokerage statements and account information, make a list of your accounts with account numbers. Keep a separate list of online bank and brokerage passwords and PINs, and keep the lists in a safe place. Also make a list of the locations of your safe deposit boxes, including where the keys to the safe deposit boxes are located.

In addition, keep your mortgage and credit information easily accessible. Make a list of your debts and regular payments, with account numbers and names of the financial institutions that issued the loans or credit cards. Other important documents to keep safe and accessible include:

  • insurance policies;
  • pension and other retirement benefit summaries;
  • Social Security payment information; and
  • contact information for financial and medical professionals, such as doctors, lawyers, accountants and securities professionals.

2. Provide your financial professionals with a trusted contact. If you work with a financial professional, provide that person with trusted contact information in case they cannot contact you or suspect something is wrong. You may want to discuss with your financial professional what you’d consider to be an "emergency," and specify when they may contact someone on your behalf.

3. Consider creating a durable financial power of attorney. A financial power of attorney gives someone the legal authority to make financial decisions for you if you cannot. That person is called your agent. The document is called "durable" because it remains in effect even if you become incapacitated. You retain the ability to change it or cancel it as long as you’re still able to make decisions. A financial power of attorney differs from a health care power of attorney, which only covers health care decisions.

After signing a durable financial power of attorney, you can still manage your money and property as long as you have the ability to make decisions. Since you’re essentially giving financial decision-making authority to your agent, it’s critical that they be someone you can trust.

4. Keep things up to date. If something changes (for example, you open a new account), be sure to keep your information as current as possible. Also, your trusted contact may change over time. Keep your financial professionals informed of changes regarding who has authority to review your account or whom they should contact in case of an emergency.

5. Speak up if something goes wrong. If you ever think someone is taking advantage of you, or that you've been the victim of a fraud, speak up. Sadly, sometimes even financial professionals and people we think we can trust commit financial crimes. If this happens to you, you're not alone—and the sooner you let someone know about it, the better chance there is of putting an end to it.

If you have an issue with a financial professional or firm, you can submit a complaint to FINRA. You can also call the FINRA Securities Helpline for Seniors® toll-free at (844) 574-3577.