You’ve probably already heard of the many schemes and pitches designed to separate you from your money—emails from Nigerian princes, phishing scams, etc. But does your bull$h!t detector go off when confronted with a slick come-on for perfectly legal-but-somewhat-questionable retirement investment pitches? There are a ton of them out there and as you inch closer and closer to retirement, you are more likely to hear about them and yes, even get roped into a presentation by a so-called retirement expert!
Retirement Investment Pitches You Should Ignore
That’s why I’m posting this today so you can get a heads up about some of these pitches that are often targeted to people just like you and I when planning our golden years in retirement. There are some investments that make sense in certain situations, but here are 7 specific BS pitches you should probably ignore!
Pitch #1 – “You must get a reverse mortgage in retirement”
Not everyone can pay off their mortgage by the time they retire. I wasn’t able to do it. If that happens, then you need to consider the cost of your mortgage payment plus property taxes, homeowners insurance, and all those random repair costs when things go wrong. How you will cope with it all when you are no longer earning a regular paycheck?
Facing these and other financial concerns, some retirees who consider themselves cash poor but “house rich” have turned to reverse mortgages. You can’t escape the seemingly endless ads on TV, on radio, and in print promoting them with celebrities like Tom Selleck or Henry Winkler making the pitch. But reverse mortgages are only suitable for people in very specific circumstances and should be used carefully and strategically.
The risks are there
Because about 10% of reverse mortgage homeowners were going into technical default and falling behind on property taxes, the U.S. Department of Housing and Urban Development increased measures at the end of 2014 to protect consumers applying for the Home Equity Conversion Mortgage program, the reverse mortgage program making up about 95% of the market (according to Forbes magazine).
Before you commit to any such pitch, seek out professional advice and make sure you’re only tapping your home equity in a way that doesn’t jeopardize your homeownership status and that makes sense for your overall retirement plan.
Pitch #2 – “What you need is a self-directed IRA”
If people recommend that you self-direct your IRA dough into low-cost index funds, I’d say that is a good idea. But many companies and advisers touting self-directed IRAs typically talk about them as a way to invest your retirement dollars in “alternative” or “nontraditional” investments.
That can range from investments in cattle and fishing rights to retail bankruptcy claims, all in the name of investment diversification. That is something often referred to as “di-worse-ification” and it’s not on my recommendation list at all. State securities regulators even warn that some of these investments may step over the line into illicit investments or activities.
If you’ve got a huge retirement stash and want to take a flier with a teensy-weensy percentage of it in a legal-but-exotic alternative, fine. Good luck with it. But if you’re dealing with the money you’ll be relying on to get you through retirement, stick with a good old, if slightly boring, diversified portfolio of stocks and bonds.
Pitch #3 – “In retirement, you’ll love owning a timeshare!”
Many of us plan to downsize our homes and upsize our travel in retirement, and so timeshare traps can target retirees. Two important rules in big bold letters to always remember are:
- Timeshares are not an investment in real estate and will not increase in value—ever! Timeshares do not appreciate in value. In fact, a timeshare often will sell for far less than its original purchase price if it can be resold at all, or even actually cost you to sell it in such a crowded marketplace.
- Repeat rule #1.
Timeshare companies will use high-pressure sales tactics to convince people to buy properties. I know from my own experience. While I did enjoy having it and traveling with it for a long time, as I got older and less able to travel because of my health I suffered from the pain of ownership. Timeshares come with annual maintenance fees and taxes and in retirement, that can be a really expensive issue. Some may even have blackout dates when the part-owners can’t visit. Many of them rapidly depreciate and are very difficult to resell.
In my case, I had to pay to get out of my timeshare and it cost me $2,000 to avoid the annual cost of over $1,000 for something I wasn’t using (and that can last the rest of your life!). Even worse, when you pass away the financial obligation passes on to your spouse and/or heirs whether or not they have any interest in ownership.
Scams have become prevalent in recent years that target senior citizens in particular when a person posing as a reseller calls the timeshare owner saying he has a buyer (or poses as the buyer) and then asks the owner for an amount of money up front to process the sale. The owners never see the money or hear from the scammer again. In a legitimate sale, commissions are paid at the time of the sale, not up front. Don’t get trapped into a so-called dream vacation property that could become a nightmare.
Pitch #4 -“I can get you really, really safe high yields!”
Given today’s low interest rates, who wouldn’t take this bait? The problem is that the combination of high yields and low risk is an oxymoron. Fatter yields and higher returns always come with greater risk. That’s true even if that risk isn’t obviously apparent or is being downplayed by the person pushing the investment.
Pushing the envelope for “really, really“ high yields can totally blow up in your face. Just think back to 2008 when investors were burned in auction-rate securities, bank loan funds, and other similar kinds of investments.
When it comes to the portion of your savings that you need to have ready access to and you can’t put at risk, you must play it relatively safe. Resist the siren song of tempting yields offered by private investment notes, promissory notes, commercial mortgage notes, and the like, and limit yourself to top-paying FDIC-insured savings accounts and short-term CDs. Granted, they’re not yielding those “super high” rates promised by some, but at least you won’t be in for any nasty surprises and you gain a lot more high yield safely!
Pitch #5 – “Don’t risk money on the volatile stock market—buy gold”
Gold fanatics haven’t been out in force lately because the stock market has been doing so well for the past few years. But once stocks hit an extended period of turbulence or experience a major 2008-style meltdown, that’s when the “gold pitch” comes on strong. When I hear phrases like “nothing holds its value like gold” and “gold provides a safe haven against stock market volatility”, I run far away.
Remember this: gold can fluctuate just as wildly as stocks do. Gold traded at slightly above $1,200 an ounce last week and that means anyone who bought gold just 7 months ago at a price of $1,352 an ounce is sitting right now on a loss of over 13%.
There may be some other reason to put a bit of your savings in gold like our good friend diversification or as a hedge against inflation or a weak dollar (although I’m not a big gold fan even for those reasons). But if it’s stability of principal you seek, gold is not where to find it.
Pitch #6 – “For peace of mind, buy guaranteed income”
Research shows that retirees who get a monthly check for life from a traditional pension are more content than those with the same level of wealth, but who have only a 401(k) and their social security payout as their retirement funds. There are two problems with that.
First, there are fewer and fewer people who have any kind of pension in their future (and even if they do, will they ever be able to collect from some companies and government entities that are in dire financial shape?).
Second, many of the people touting the virtues of guaranteed income are often peddling variable annuities with income riders that can carry big fees of 2% to 3% a year—and are really complicated to boot.
If you would like more guaranteed lifetime income than just Social Security alone will provide, consider putting a portion of your savings into an immediate annuity. Those are guaranteed and easier to understand, less costly, and you can comparison shop for on your own. Then invest the remainder of your nest egg in a mix of stocks and bonds that can provide additional income, plus long-term growth.
Pitch #7 – “Forget bonds—you can live off stock dividends!”
Many advisors create the impression that putting more money into dividend stocks is an acceptable way to generate extra income now that bond yields are so low. Granted, bond yields are low and when interest rates rise (as they are right now), bond prices will take a hit with longer-maturity bonds getting whacked more than short- to intermediate-term ones.
That does not mean that dividend-paying stocks are less risky than bonds. Stocks that pay dividends are still stocks, and thus far more risky and volatile than bonds. If you doubt it, consider that iShares Select Dividend ETF (DVY) lost more than 60% of its value compared to just 50% in the broad stock market during the 2008 recession.
That’s an extreme case, but my point is that dividends or no, stocks have a bigger downside potential than bonds. You can include dividend stocks as part of your portfolio. But don’t let anyone sell you on the idea that dividend stocks are a substitute for bonds.
Successful retirement planning requires due diligence and being strategic so you can avoid BS and “the gotchas” that can drain your savings. Whether your retirement is 30 years off or just around the corner, careful planning is essential.
Your retirement money and your need to invest make you a target, and you will likely encounter some questionable retirement investment pitches. You should get trustworthy financial advice to help you set yourself up for a great retirement.
Have you thought about these kinds of issues as you prepare for retirement? Have you planned a path to a successful retirement yet and if not, do you feel confident that you can and will do so before any problems arise?