We present a theory suggesting that the ability to build category representations that reflect the nuances of category structures in the environment depends upon clustering mechanisms instantiated in an MTL-PFC-based circuit. Because function in this circuit declines with age, we predict that the ability to build category representations will be impaired in older adults. Consistent with this prediction, we find that older adults are impaired relative to younger adults at learning nuanced category structures that contain exceptions to the rule. Model-based analysis reveals that this deficit arises from older adults' failure to engage clustering mechanisms to separate exception and rule-following items in memory.