@dyslexia,
dyslexia, I think you are describing with a personality disorder and not an "under the surface psychosis". People with personality disorders can function well in certain environments (like work, or other controlled environments), but can have significant difficulty in interpersonal relationships with family or friends. Personality disorders are lifelong in nature. They are quite difficult to treat.
There is a wide range of personality disorders, and people with borderline personalities, or histrionic personalities, or paranoid personalities, or obsessive-compulsive personality disorders, for instance, can be very difficult to get along with because they may make extreme emotional demands on the people around them in social situations.
Under stress, someone with a borderline personality disorder, for instance, can very briefly decompensate into a psychotic state where they may lose touch with reality. For instance, they might suddenly become delusional and believe family members are trying to harm them in some way. But this is generally very brief and the psychosis will usually abate when stress is reduced. It is due to the temporary failure of adaptive mechanisms rather than to the presence of an underlying psychotic disorder. Other personality disorders, like schizotypal personality, can result in lifelong behavior or patterns of thought which are quite odd or eccentric, but not psychotic.
Aging itself is a stressful condition. There are physical declines, cognitive declines, changes in life circumstances and routines, losses of friends and loved ones. All of this can exacerbate any previous personality problems. The personality "quirks" do become more overt, and possibly harder to put up with or ignore. The person may be less able to inhibit certain kinds of behaviors or emotional reactions, or they may experience more anxiety. And this can result in withdrawal by friends or family if they find the behavior too intolerable, or annoying, or strange, or if they plain don't know how to deal with it. At this point, the person might well benefit from some psychiatric intervention. While personality disorders per se are not treatable with medication, there are medications which can alleviate some of the symptoms or help stabilize the person's functioning. Some supportive psychotherapy might also be useful, particularly if the person lacks good social supports.
None of this should be confused with Alzheimer's or any other form of dementia. Dementias do not generally develop gradually over years. It might seem that way because normal age-related cognitive decline might be followed by the onset of a dementia, thus making it seem as though the dementia was gradual in onset.
More importantly, dementias, particularly in the initial stages, primarily affect cognitive functions and not personality. Generally memory, particularly short term memory, and concentration and attention span are affected first. Difficulty with things like problem solving, abstract thinking, and judgment might then start to appear, along with intensified memory problems. This process continues and eventually begins to ravage all cognitive and intellectual functions. In the early stages, the person may be aware of their cognitive problems, and many become depressed in response to that. In later stages, aggressiveness might appear because of underlying neurological changes. Other people might exhibit extremely flattened affect and show little emotional response, and some may display inappropriate affect. These things are due to the neurological condition or the disease causing the dementia, and, obviously, they might alter personality, but not in a way to increase pre-existing "quirks" or lifelong difficulties with social interacting. If the cognitive problems are not predominant, the condition is not a dementia.
So, it really sounds like you are describing someone with some lifelong personality problems whose functioning may have deteriorated somewhat due to the changes (of all sorts) that accompany the aging process. Rather than withdraw from this person, it might be helpful for friends and family to urge the person to see a therapist, or at least the family doctor, who might be able to make an appropriate referral, if there is concern about how the person is functioning.
