Previously institutionalized older patients with schizophrenia show changes in cognitive and functional capacity over time. This study examined changes in real-world functioning in a sample of people with schizophrenia who varied in their history of long-term institutionalization and related changes in real world functioning to changes in cognition and functional capacity over the follow-up period. Older patients with schizophrenia (n=111) were examined with assessments of cognitive functioning, functional capacity, clinical symptoms, and everyday functioning. They were then followed up to 45 months and examined up to two times. Mixed-model regression was used to examine changes in real-world functioning in social, everyday living, and vocational domains over the follow-up period and identify potential predictors of change. Everyday functioning worsened over time in all three domains. Although length of longest hospitalization predicted worsening, this influence was eliminated when the course of functional capacity was used to predict the course of everyday functioning. For both vocational and everyday living domains, as well as the composite score on functional status, worsening in performance based measures of everyday functioning and social competence predicted worsening in real world functioning. Changes in negative symptoms further predicted worsening in the everyday living domain. Worsening in everyday functioning is found in people with schizophrenia and those with a history of greater chronicity and severity of illness seem more affected. These influences seem to be expressed through worsening in the ability to perform everyday functional skills. Potential causes of these changes and implications for reducing these impairments are discussed.