Financially Savvy? You Must Be Middle Aged!

Middle aged people make better personal finance decisions than other adults, according to new research highlighted in the Wall Street Journal.

Researchers from the Federal Reserve, MIT, and Harvard found that financial sophistication peaks at about age 53.

How do they know? They looked at individualized data from six types of debt: mortgages, home equity loans, home equity credit lines, auto loans, personal credit cards, and small business credit cards. Other things being equal, older and younger adults borrow at higher interest rates and pay more in fees than the middle aged, reflecting, they believe, greater financial sophistication at midlife.

They hypothesize that middle age is the time when the combination of mental acuity and experience are at their peak. Sound financial decision-making requires both. Older people, they think, may be more experienced, but not as sharp; younger people may be quick, but not very knowledgeable (others would argue that not all mental functions decline with age, and some may improve).

The Wall Street Journal's David Wessel points out that this may be a problem for user-choice instruments such as 401(k)s and portable health plans, which place some reliance on the investor making sound decisions.

It would be interesting to see whether recent findings that people leave their 401(k) contributions in low-yield default investments -- or even fail to enroll at all -- have an age component to them.

A pdf version of the paper can be downloaded here.