Aging has independently been associated with regional brain atrophy, reduced slow wave activity (SWA) during non-rapid eye movement (NREM) sleep and impaired long-term retention of episodic memories. However, whether the interaction of these factors represents a neuropatholgical pathway associated with cognitive decline in later life remains unknown. We found that age-related medial prefrontal cortex (mPFC) gray-matter atrophy was associated with reduced NREM SWA in older adults, the extent to which statistically mediated the impairment of overnight sleep-dependent memory retention. Moreover, this memory impairment was further associated with persistent hippocampal activation and reduced task-related hippocampal-prefrontal cortex functional connectivity, potentially representing impoverished hippocampal-neocortical memory transformation. Together, these data support a model in which age-related mPFC atrophy diminishes SWA, the functional consequence of which is impaired long-term memory. Such findings suggest that sleep disruption in the elderly, mediated by structural brain changes, represents a contributing factor to age-related cognitive decline in later life.