Retirement planning is one of the topics that should be on everyone’s mind. When you’re trying to secure your retirement, it’s important to consider rip-offs. There are retirement investment and planning rip-offs that everyone should know about.
4 Retirement Investment and Planning Rip-Offs
Some financial advisors say that they have “no fees,” but the reality is that there are always some types of fees. There are, typically, two types of fees that you’ll deal with, which are:
- Flat fee: Often a percentage of the assets being managed.
- Commission: Fees aren’t visible to you, but the advisor receives a commission from you investing in certain products.
If the advisor states that there are no fees for their services, it should be a red flag for you. The advisor is in the business of making money, so there has to be fees or commissions being paid.
2. Bait and Switch
A bait-and-switch occurs when someone states that they can help you achieve a certain rate of return that’s higher than the average. For example, let’s assume CDs are offering 0.6% returns, but the advisor or banker states that they’re able to secure a 6% return for you.
You must ask questions. If a rate seems too good to be true, something is off. It’s vital to ask how the interest rate being offered is achieved. There are some offers that are “teaser rates,” and what this means is that during the first year, your rates may be 6%.
After year one, the rate falls back down to a normal rate.
If the advisor states that the financial vehicle offers a 6% or 7% guaranteed return for, say, 10 years, you’re likely being put into a fixed annuity with a rider. The growth rate is based on the interest for the income stream.
What does this mean?
Your income stream from the annuity has a 6% or 7% return, but it’s not something that you can decide to take out all at once.
When rates sound too good to be true, ask more questions. The annuity above is a good product, but if you don’t know that the rate is just for income, you might feel duped. Knowing and understanding the following can help:
- The overall rate
- How long the rate will last
Oftentimes, these high rates of return are just introductory rates and won’t be in place forever. Think of credit card offers that aim to have people sign up. Lenders are willing to offer 0% interest for six months or a year to get you to apply. It’s a similar concept here with bait and switch.
3. Outrageous Claims
Rates of return are important if you want to reach your dream of retirement. You need steady, consistent returns to retire. When you’re looking at investment vehicles, there is something called “illustrations.”
These illustrations are claims and may say you can earn 6% – 8% returns.
A fixed annuity may offer these returns on occasion, but that doesn’t mean that you’ll achieve these rates. Illustrations often claim that you can earn rates “up to,” or that others have earned “as much as,” but these are often unique cases.
Chances are, these high rates of returns were very specific cases and aren’t repeatable every time.
Even if an advisor states that they’ve had 10% returns for their clients last year or five years ago, it doesn’t mean that they’ll be able to replicate these returns in today’s market.
Instead, we recommend:
- Asking for historical return data
- Really reading the fine print
Outrageous claims are a great way to lure you into a contract or financial vehicle, so be on the lookout for claims that just sound too good to be true.
4. Outdated Beliefs
A long time ago, in the 1900s, there were no regulations in the banking system. When markets fell, customers would go to the bank and start withdrawing their money. The government created the FDIC to support the banking system.
The FDIC is a protection offered to you by the federal government that if the bank goes under, you’ll have protection for your money.
Imagine today, if everyone had the belief of the 1900s, and decided to ignore the FDIC. Some advisors fall into these old beliefs. Just 20 years ago, a lot of people didn’t like annuities and were very much against them.
Today, there are still some advisors stuck in their outdated beliefs that savings in retirement products are bad.
Holding onto old, outdated belief systems is never a good idea.
Offerings change, and the market changes, too. An advisor should look into all financial vehicles and the current state of a financial vehicle today. In the past 20 to 25 years, things have changed and at a rapid pace.
We do recommend maintaining a diverse portfolio of products and would never suggest putting all of your investments into one vehicle. However, there is a time and place for most financial vehicles in a person’s investment portfolio.
If there is one take away from the points above, it’s that you really need to take control of your retirement planning. Educate yourself on investment options and don’t be afraid to question how a certain financial product is able to offer substantially higher returns than average.
It’s your money, and you have every right to ask questions to safeguard your retirement.
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