We investigated the impact of cognitive deterioration and identity loss on well-being in older adults with dementia. We predicted that in addition to the negative effects that decline in cognitive ability has on dementia sufferers' well-being, there are also independent negative effects of identity loss. Participants (N = 48) were residents receiving standard care with mild dementia, residents receiving specialized care with severe dementia, and an age-matched community comparison group. Predictably, autobiographical memory and cognitive performance decreased linearly as a function of care level. Life satisfaction was lower for the standard care group with mild dementia than for the community sample, but, unexpectedly, life satisfaction was just as high for the severe dementia group receiving specialized care as for the community group. A similar U-shaped pattern was found in ratings of personal identity strength, and this mediated the life satisfaction effect. We conclude that amongst those suffering from dementia, loss of memory serves to compromise well-being primarily because it is associated with loss of identity.