Thursday 15 March 2012

8 Potential Money Pitfalls for Retirees


Money Traps Facing the Older Set

By Kerri Fivecoat-Campbell | MainStreet  
For many Americans, retiring means entering a new realm of financial realities, from learning to live on a pension or Social Security checks to downsizing to a smaller home. Unfortunately, while retirement can be a great time to enjoy the later years of life, there are several pitfalls to watch out for to guarantee your money lasts.

To help you on your journey through retirement, we examine eight potential financial traps to be aware of. While there are benefits to some of the financial products and offers we discuss, retirees must learn how to use them properly.

Here's what you should know.

Credit Cards

Retirees who do decide to carry a credit card should pay them in full every month, says Peter Macaluso, vice president of FMI Retirement Services.

“I always like it when someone loans me money at no charge and that is what happens when you pay off your credit card at the end of the month,” he says.

Macaluso adds that if you don’t pay the credit cards off every month, you risk getting into a high-interest form of debt, which might make it difficult to meet the payments you will owe. He also advises that if you’re already in credit card debt, consider taking out a personal loan with a lower percentage rate and getting out of debt as fast as possible.

Long-Term Care Insurance

Long-term care insurance can actually be a big benefit to retirees with assets.

“Many retirees have adequate or more than adequate coverage for automobile accidents and house fires,” says Certified Financial Planner Joel J. Ohman. “Yet the likelihood of getting in a car wreck is around one in 240, having a fire in the house is one in 1,200, and needing long-term care is one in two.”

Macaluso also says that retirees can consider reducing the amount of assets they have and defering payments for long-term care until they need them. “Long-term care insurance can be a great option, but it is only in very specific situations. For people with very little assets it will be a very hit-or-miss type of insurance,” he says.

[Related: 10 Bad Money Habits and How to Break Them]

Reverse Mortgages

Reverse mortgages can be a great product for many retirees who need or want a lump sum payout or additional monthly income based on the equity in their home. These loans allow retirees to use the equity in their home and payment is not due until they die. The industry is highly regulated and counseling is a requirement for legitimate reverse mortgages before a loan can be granted.

AARP’s website lists some of the concerns of taking on a reverse mortgage, including the fees involved and the possibility of taking the mortgage too early. The Department of Housing and Urban Development also has resources to ensure retirees are fully informed and going with a legitimate source when investigating a reverse mortgage.

Annuities

While many of these are legitimate legal products that allow some benefits in the form of tax deferment and death benefits, the financial experts we spoke to don’t like them.

“They often sound very good, but come chock-full of hidden fees,” says Elle Kaplan, CEO and founding partner Lexion Capital Management LLC. “Retirees are best served by a fee-only investment adviser, who is only in one business - investment advice.”

Life Insurance

Macaluso says a life insurance policy can be good, but retirees must be aware the cost versus the cash value.

Macaluso gives an example of a 71-year-old employee contemplating retirement any day. The life insurance policy cost more than $8,000 per year and the death benefit was only $50,000. The Cash Surrender Value was less than the annual premium payment.

“This person was essentially paying into a product that was guaranteeing him a severely negative return,” Macaluso says. “Not everyone at this business was in the same position, but this was an example where this was an extremely bad investment for this person.”

Phone Scams

“People will contact gullible people or seniors in order to have them send money or give personal information,” Macaluso says. “If they contact you, never give personal information. If you feel it might be legitimate, contact the institution they say they are calling you from.”

Catherine Gordon, a chartered financial analyst who helps oversee Vanguard's Institutional Asset Management group, advises that retirees take advantage of the tools available to help them evaluate the multitude of opportunities that may come their way. Three very useful sources are the Risk Meter and Scam Meter tools sponsored by FINRA, the largest independent securities regulator in the United States, and the Securities and Exchange Commission’s Ask Questions brochure.


[Related: What Retirees Wish They'd Done Differently]

Reverse Pension Plans

If you hear the words "reverse pension plan," a red flag should appear in your mind, Macaluso says.

“One of the most egregious forms of deceit is reverse pension plans,” Macaluso explains. “These are just flat-out scams. Anything where you pay $50 to get $50,000 is a scam. We were recently asked by a few individuals about these and we told them to run away as quickly as you can.”

Shady Salespeople

If someone approaches you to sell you the “next best thing” or a “sure thing,” be skeptical of the salesperson's intentions, say our experts.

“You can avoid a world of hurt by first asking, ‘How are you paid?'” Kaplan says. “If you are not given a clear explanation, it is a big red flag.” 

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