Archives for July 22, 2018

The three-bedroom home on Lexington Court in Largo, Fla., 20 miles north of St. Petersburg, looked like the perfect family home, with a nice front yard, central cooling and laminate floors. For 18 families, it turned it was too good to be true — and at a serious cost.

A married couple, Nicole and David Johnson, allegedly posed as the owners of the rental property, giving tours and collecting more than $25,000 from those families, local television news station WFTS reported in late June.

The home, it turned out, belonged to Nicole Johnson’s parents and was not available for rent. The Johnsons targeted the families using social media and by posting to Craigslist. Local police have called it the largest rental scam they’ve ever seen. Many of the victims only realized that the listing was a fraud when they showed up to the property on the same day and notified police.

Some of those families were moving to Florida from out of state, and many have had to resort to GoFundMecampaigns in an effort to recoup their losses, according to WFTS. The scammers are believed to have fled the state.

Denise Phillips, a military veteran and mom who has three sons in the service, wanted to book a trip to Hawaii to spend Thanksgiving with one of her children.

But she didn’t want to pay for the trip all at once. So she started searching online for installment plans and found one through the lending company Affirm.

“I started looking into it, and it said ‘No hidden fees,’” she said. “I tried it, and it was actually true.”

The experience was convenient, she said, and since that trip she’s used Affirm to book more trips: One for a fishing trip to Alaska next month and she has plans to use it in January for a trip to Bermuda.

Affirm charges interest, but presents that total as a flat fee at the beginning of the payment process, which was more comforting than putting the big purchases on a credit card, she said.

The fee varies depending on the customer’s creditworthiness and the time period during which they plan to pay.

Phillips isn’t alone. In recent years, companies have increasingly allowed travelers to book airfare, hotels and amusement-park tickets, with the promise they’ll pay later.

The airline JetBlue JBLU, +0.05% announced in 2017 a partnership with the payments company UpLift, that allows customers to pay for flights in 12 monthly installments, with APRs starting at 8.99%.

Similar companies, including Airfordable and BookIt.com’s PayDelay, specialize in travel installment loans.

And lenders that typically offer personal loans, including Affirm and Marcus by Goldman Sachs, also advertise “travel” or “vacation” loans.

Taking out a loan for a vacation is risky

But financial experts say taking out a loan for a vacation can be a bad idea. If someone absolutely has to book a trip, there might even be cheaper ways to do it, said Nick Clements, the co-founder of personal finance company MagnifyMoney.

One possibility: Credit cards with a 0% interest-rate introductory period, he said. That is, of course, if consumers can pay the full amount they put on the card before the introductory period is over.

What’s more, not all installment plans work out as well as they did for Denise Phillips, said Rachel Podnos, an attorney and financial adviser based in Washington, D.C.

Interest rates advertised as “low” still cost consumers more than they should be paying on a discretionary purchase like a vacation, she said.

At Affirm, the interest rate can be up to 30% — significantly higher than on a credit card, which has an average interest rate of 17%, according to personal-finance website Bankrate. Although there is a key difference: Affirm gives the total amount people will pay up front, and charges simple interest rather than compound interest.

Still, financing a vacation is “a terrible idea all around,” Podnos said. “It’s one thing to finance your education or home purchase, or even a car purchase in some situations … but to finance a vacation is to me just insane. If you can’t afford to pay for your vacation out of cash on hand, don’t take a vacation.”

It sometimes makes sense to pay for hotels and flights early

There are some times when splitting up payments for a vacation can pay off.

Ryan Anderson, a 25-year-old living in Champaign, Ill., prides himself on his “travel hacking” skills and decided to take advantage when a Carnival Cruise Line CCL, -1.22% vacation gave him the option of paying in installments.

He paid no fees to do that.

He had the cash on hand. But he decided to split the cost up so that he could use a $300 travel credit he gets with his Chase Sapphire Reserve JPM, +1.26% credit card twice: Once in late 2016 and once in late 2017. He made his remaining payment on a Capital One COF, +1.95% Venture card, to meet a minimum spending threshold.

“If I had to pay interest to go on a vacation, I just wouldn’t go on a vacation,” he said.

There’s another key way installments can pay off: If travelers can afford to book their flights or hotels earlier, they may be able to get better prices, said Tom Botts, the chief commercial officer at UpLift.

And it gives consumers an option when they have to take an immediate trip, he said, such as visiting a sick family member.

“We’re not out there pushing people to take trips they shouldn’t take,” he said. “We believe altruistically that allowing people to do that on their own terms is a greatly unserved need.”

Andrew Biggs, American Enterprise Institute scholar (and fellow Forbes contributor) has a new article at the Washington Post, “State-run retirement plans are the wrong way to protect the poor,” in which he addresses the new auto-enrollment state-managed IRA plans.

Five states are launching plans to automatically enroll employees, predominantly lower-income workers, in state-administered individual retirement accounts. More than 20 other states are considering “auto-IRA” programs like those of California, Connecticut, Illinois, Maryland and Oregon. Auto-IRAs seem like an obviously benign effort: Only about 20 percent of low-income workers participate in 401(k) plans, and many low earners depend heavily on Social Security when they retire.

But bureaucratic good intentions sometimes address problems that aren’t problems or end up doing more harm than good. In the case of auto-IRAs for low-income workers, states are likely doing both: These workers are in better shape for retirement than misleading news coverage suggests, and auto-IRAs could saddle them with higher debt while disqualifying them from means-tested government health and welfare programs — thus saving the states a fortune.

The problem, Biggs writes, is that low-income workers have little to no need to save for retirement because Social Security (and, as needed, the relevant means-tested benefits) will provide a sufficient degree of pay replacement, at the standard of living they’re accustomed to. However, many of these folk are living at the margin to such a degree that even a small loss in income due to (semi-)obligatory savings could increase their debt levels (you’d think they could adjust their savings over time, but Biggs cites a study demonstrating this effect), and the asset tests for many benefits for the poor would mean that they wouldn’t be able to benefit from much of their savings anyway. Biggs notes as a partial answer that “A good model is Britain’s national saving plan policy of automatically enrolling only workers with salaries above £10,000 pounds (about $13,000).”

So here are a few thoughts to build on this:

What the United Kingdom has done is not simply a matter of a creating an income threshold below which workers do not participate in the autoenrollment plan. Not only is participation for workers with less than £10,000 in income on an opt-in rather than opt-out basis, but income below £5,876 is not included in the calculation at all. A typical retirement plan in the Netherlands works similarly, with pensionable salary for employer pension purposes excluding between approximately the first €13,000 – €15,000 of pay, depending on plan type. Likewise, Switzerland’s Second Pillar plan starts at income of about CHF 25,000. And in my “MyPlate” retirement savings proposal I had suggested “a rule of thumb such as, ‘save 15% of your annual income above $20,000.'” (As a reminder, I’d also prefer a Social Security system in which the benefit was a flat benefit for everyone to ensure that every American is protected from poverty, but even absent this, there are multiple layers of supplemental benefits, such as SSI and food stamps, for the elderly whose benefit accrual was low during their working years.)

In our American Social Security system, we don’t have a floor but we do have a ceiling, and that is applied on an annual basis; at whatever point in the year, one reaches that year’s ceiling, Social Security taxes stop. But this wouldn’t make sense for a floor, and for savings for the poor, which should be regular and predictable. What would make sense, though, is to apply a floor on an hourly-wage basis. For example, for simplicity’s sake, a plan could make automatic contributions on income that exceeds, when adjusted to an hourly basis, $10 per hour (though the nice rounding would be lost if the threshold is indexed for inflation) or on income that exceeds the minimum wage.

For most of us, retirement is a goal we hope will allow us to enjoy the fruits of previous sacrifices. While advance preparation clearly increases the likelihood that we can enjoy our “golden years,” there are many circumstances that dictate whether retirement is an opportunity or a burden.

Most of us would also like to leave a legacy to those who follow. We hope what remains at our passing will make our beneficiaries’ lives better. But again, many uncertainties can impact the estate we leave.

Those who need to pay attention to such things say that every day an average of 8,000 baby boomers will turn age 65, a rate which will continue for the next several years! This reality highlights another sobering issue that seniors must consider: the costs and consequences of long-term care.

According to government statistics, 70 percent of seniors will need some form of long-term care. The typical health care insurance plan will not pay these costs, nor will Medicare, Medicare supplement policies, or the Affordable Care Act.

With potential monthly costs of $10,000 or more, the effects of long-term care can be devastating on retirement and estate plans. How does a senior couple absorb the cost of assisted living or skilled nursing care for one spouse and provide for the other spouse to remain at home?

Your estate plan can no longer simply address what happens to your assets when you die. It must work in lockstep with your retirement plan and account for health issues, including long-term care.

Fortunately, creating a cohesive plan likely will not require a major change in your approach. But failure to account for these risks can have a crippling effect on your estate.

Fortunately, there are options, some of which did not exist even five years ago. Come and learn the options available to you!