Archives for October 6, 2019

When you’ve spent your entire career diligently saving for retirement, the last thing you want is to get taken advantage of by a scammer and lose your hard-earned savings. However, many retirees are unaware of some of the most common scams they could face, putting themselves (and their money) at risk.

New research shows that the majority of adults age 65 and older are unaware of some of the most common scams often targeted at older Americans — and this mistake could potentially drain your retirement fund.

What do scams look like?

Fraudsters are becoming smarter and more sophisticated, so scams are not as easy to detect as they once were. They’re also becoming more expensive: The average scam victim loses around $30,000, according to a study from Allianz Life, and more than 10% of victims lose $100,000 or more.

To avoid falling victim to a scam, it’s crucial to understand what a scam looks like. That way, you can spot it a mile away before you give out any personal information.

However, a new survey from AIG and Morning Consult found most older adults are unfamiliar with some of the more common types of scams. More than half (52%) say they’ve never heard of the prepaid credit card scam, where unsuspecting adults are told they have an outstanding debt that needs to be paid using a prepaid credit card or debit card. Then, of course, once the scammer has access to your finances, they make off with your money.

Second, approximately 57% of older adults say they’re unaware of the invoice scam, where a scammer contacts a potential victim saying they work for a certain company (often a utility company) and that the victim owes a fee. Roughly 57% of older Americans also don’t know about the romance scam, in which a scammer will act as a romantic interest to the victim and then ask for money. Finally, 60% of older adults say they don’t know about the pigeon drop scam, when a scammer says that they have a significant amount of money that they’ll share with the victim if the victim makes an upfront payment.

This is nowhere near an exhaustive list of all the scams out there, as con artists are coming up with new ideas every day. But by being aware of some of the general traits of common scams, you can protect your money from thieves.

How to protect your cash from scammers

The number one rule for avoiding a scam is not to give out any money or personal information unless you’re 100% positive the person asking for it is legitimate. If it sounds fishy, it’s better to be safe than sorry and steer clear.

If you’re unsure, ask as many questions as you can. Scammers will likely feel uneasy if they think someone is onto their scheme, and if they can’t provide answers to your questions (or their answers don’t sound right), hang up and file a complaint with the Federal Trade Commission.

Sometimes scammers will pose as government employees in an attempt to seem more official, and you’ll need to be extra careful when dealing with these fraudsters. One of the fastest-growing scams involves scammers calling to say they’re from the Social Security Administration and that there’s a problem with your Social Security number. They may tell you it’s been compromised or involved in a crime, and you need to confirm your number over the phone. One of the reasons the scam is so effective is that the scammer will often “spoof” the caller ID system so that the Social Security Administration’s real phone number will pop up on your phone. That can trick victims into thinking the call is legitimate and providing any information the scammer asks for.

If a call from a so-called government official sounds suspicious, hang up and call the official agency’s phone number (not the number you received the call from). Tell them about the call you just received and ask if it’s legitimate before you give out any personal information. The Social Security Administration (and many other government offices) will never ask for your personal or financial information over the phone, so if you receive such a call, it’s safe to assume it’s a scam.

When it comes to your financial security, you can never be too careful. Even one wrong move can result in your losing thousands of dollars, and once the scammer has your money, there’s often little or nothing you can do to get it back. By taking preemptive measures to protect yourself against fraudsters, you can safeguard your savings.

The state in which you retire could have a huge impact on your senior years, for better or for worse. For some seniors, the decision of where to retire boils down to things like proximity to family and climate.

But there are financial implications to consider on a state-by-state basis, as well. Here are three, in particular, to focus on as you evaluate your choices.

1. State income taxes can eat away at your nest-egg withdrawals

Just as you’re liable for state taxes on your income when you hold down a job, your earnings are taxed at the state level in retirement. And by “earnings,” we’re largely talking about IRA or 401(k) distributions.

2. Some states tax Social Security benefits

Chances are, Social Security will be a significant source of income for you during retirement. If it’s your only source of income, you might avoid federal taxes on your benefits, but if you have other income, whether from a retirement savings plan, pension, or part-time job, you’ll likely be taxed on those benefits at the federal level.

But that’s not all. There are 13 states that impose a tax on Social Security income, and if you retire in one of them, you could end up losing even more of those benefits. Those states are:

1. Colorado
2. Connecticut
3. Kansas
4. Minnesota
5. Missouri
6. Montana
7. Nebraska
8. New Mexico
9. North Dakota
10. Rhode Island
11. Utah
12. Vermont
13. West Virginia

Most of the above states do offer an income-based exemption that lets you avoid taxes on benefits if you’re not a particularly high earner in retirement. But Minnesota, North Dakota, Vermont, and West Virginia offer no exemption at all, so keep that in mind as you narrow down your choices.

3. Medicare plan options vary by state

It’s easy to think of Medicare as a national health program, but actually, the state you retire in could dictate the sort of coverage you get. While coverage under Parts A and B, which cover hospital and preventive care, respectively, are universal no matter where you live as a senior, Part D plan offerings can vary from state to state. Part D covers prescription drugs, and some states offer a larger variety of Part D plans — and more affordable plans — than others.

The same holds true if you’re planning to enroll in Medicare Advantage instead of original Medicare. The cost and availability of Advantage plans can vary by state, so be sure to do some research before settling on your future home.

There are plenty of non-financial reasons to retire in one state over another, but before you make that call, be sure to keep the above points in mind. The last thing you want is an added dose of money-related stress during your senior years.

As you’re planning for retirement, there are several tools you can take advantage of to help you save — a workplace 401(k), for example, or an IRA. Plans like these allow you to invest your money for the future, racking up serious savings along the way.

There’s one other tool that can help you build a stronger nest egg, yet the vast majority of workers don’t fully understand it: the health savings account (HSA).

While 57% of workers say they have a good understanding of how an HSA works, according to a recent survey from Bank of America, only 11% can name four of the HSA’s most distinguishable features.

An HSA can be a lifesaver in retirement, especially if you face high healthcare costs (which the average retiree will, even with Medicare coverage). So it’s more important than ever to understand this vital retirement tool and how it affects your savings.

What is an HSA, exactly?

You may know that an HSA is an account that helps you save money for medical expenses, but it’s more than that. It’s essentially a mini retirement fund just for healthcare costs, and it has some serious advantages.

There are four traits of the HSA, though, that the majority of workers don’t understand. The most commonly misunderstood feature, according to Bank of America’s report, is that it offers a “triple tax advantage.” When you invest in an HSA, your contributions are tax-deductible up front. Then your money grows tax-free while it’s in your account; and finally, you can also avoid paying taxes on your withdrawals as long as the cash goes toward qualifying medical expenses. When you’re saving specifically for healthcare expenditures, the tax savings of an HSA can’t be beat.

The second most misunderstood HSA attribute is that your funds can be invested. An HSA isn’t simply a savings account just for healthcare expenses. As with a 401(k) or IRA, you can invest the money in your HSA in the stock market to maximize its grow over time, and see much higher returns than if you were to simply stash your cash in a savings account.

Another one of the HSA’s commonly misunderstood traits is that the money doesn’t expire. Unlike a flexible spending account, money in an HSA doesn’t have to be used within a certain amount of time. You can invest it and let it grow for decades if you’d like, not withdrawing it until you need it.

Finally, the fourth distinguishable feature is that in order to be eligible for an HSA, you need to be enrolled in a high-deductible healthcare plan. That means your current health insurance plan must have a deductible of at least $1,350 (for individuals) or $2,700 (for families). If you are eligible for an HSA, there’s also a limit to how much you can contribute each year. For individuals, that limit is $3,500, and for families, it’s $7,000. Those who are 55 or older can also take advantage of catch-up contributions, meaning you’re allowed to save an additional $1,000 per year.

Knowing exactly what an HSA is and how it works is only one step of the equation. The next step is to learn how to make the most of it.

Maximizing your HSA

If you’re eligible to open an HSA, it can be a powerful tool in your retirement planning toolbox. Healthcare costs are skyrocketing, and even with Medicare coverage, the average retiree spends approximately $4,300 per year on out-of-pocket medical expenses, according to a study from the Center for Retirement Research at Boston College.

Because HSAs have the triple tax advantage, your money can go further toward healthcare costs when you invest it in one of these accounts versus a 401(k) or IRA. Also, keep in mind that the money in your HSA doesn’t only have to be used for healthcare expenses. Putting it toward medical costs is the only way to avoid paying taxes on your withdrawals, but if you need the money for other reasons, you’ll just need to pay income taxes on it like you would for 401(k) or traditional IRA withdrawals.

When saving for retirement, it’s important to balance saving in your retirement fund and your HSA. That can be tough, though, if you don’t have much cash to spare. If you have access to a 401(k) with matching contributions from your employer, make it your top priority to earn as much “free money” as you can. Next, try to balance your retirement account and HSA contributions based on the rates of return you’re earning on each of them. If your 401(k) contributions are earning a 7% annual return, for example, while the money in your HSA is generating a 5% annual return, it might be a good idea to prioritize your 401(k) while still ensuring you have some cash stored in your HSA.

Also, because HSAs have lower contribution limits than 401(k)s and IRAs — 401(k)s have a limit of $19,000 per year in 2019, while IRAs are limited to $6,000 per year — if you max out your HSA, you can simply stash the rest of your savings in your retirement account.

An HSA is a powerful way to save for one of the largest (and most unpredictable) expenses you’ll face in retirement. But to save as much as possible, you’ll need to know how an HSA works as well as how to maximize it. By making the most of your HSA, you can save more for retirement and prepare for any other hurdles life may throw your way.

Yanely Espinal knows what the power of a financial education — she came from a low-income home with two parents and nine children, and ended up with credit card and student loan debt even after receiving a full scholarship to college.

The Brooklyn native said she often saw a difference between herself and some of the wealthier students around her. She attended high school near Lincoln Center in Manhattan, where many students wore brand-name clothes and returned from holiday break with the latest gadgets. When she went to Brown University, her friends were often going bowling or eating at Chipotle, CMG, +1.06% activities she couldn’t afford on a regular basis.

So she opened her first credit card at 18 years old, with a $1,500 limit. “I never had that much money before,” she said. She used that credit card — and three others she opened during her college years — for textbooks and a laptop, as well as trips to the movies and restaurants. By the time she graduated, she had nearly $20,000 in debt — $15,000 in credit card debt and $5,000 from a student loan. Her credit card interest rates were around 21%.

A $9 book called “Women and Money” by Suze Orman caught her eye one day while she was buying shampoo at Duane Reade. “That book taught me everything I wish I knew before I was 18,” she said. She spent the next few years reading up on saving and investing, and listening to podcasts and TED talks about financial topics.

“I became obsessed with knowledge I felt I was deprived from,” she said. “It was social justice and financial empowerment, and that combination helped fuel my curiosity to learn as much as I could.” She started her own YouTube channel, MissBeHelpful, to share some of her own lessons about money as well.

After the YouTuber paid off her debts, in less than two years, she opened her first Roth IRA and then allocated whatever debt payments she used to make into savings and investing. Three years after that, in March 2018, she had amassed just shy of $50,000. In the last 18 months, she’s doubled her net worth. Part of her inspiration was the goal to eventually have a comfortable retirement.

Espinal, now 30, is the director of educational outreach at Next Gen Personal Finance, a nonprofit organization that offers free resources and tools to educators interested in teaching personal finance.

Less than half of U.S. states have a financial literacy requirement for high-school students. Financial illiteracy is a growing problem in the U.S., especially for young adults. Less than one-third of college students (28%) could correctly answer three multiple-choice questions about interest, inflation and risk diversification, according to a 2015-2016 FINRA study, and slightly more than half (53%) could do the same.

Although financial literacy is useful, there is a debate about when and how to dispense these lessons. Presidential candidate Andrew Yang tweeted in September that, in his experience, teaching financial literacy is difficult to people who don’t have money. Some Twitter users criticized him for the statement, saying individuals can make the most of the lessons they learned when they finally do come into money, while others agreed with him that having the funds beforehand allows people to put their financial education to use immediately.

Still, there are steps anyone can take to get started on the path to financial freedom — and eventually a nest egg like Espinal’s. Here are a few:

Embrace as much information as you can

Much of Espinal’s success can be traced back to her thirst for knowledge, and all the time she spent reading up on financial topics and soaking up information in podcasts and shows about money.

“When you don’t know about your money and you don’t know about money, you are in this helpless place,” she said. “Learn as much as you can and look at your situation.”

There are plenty of benchmarks and metrics online to measure how well an individual is doing compared with her peers. Sometimes these guidelines can be useful, as a way to gauge what is average, but sometimes they can be discouraging. The key, Espinal said, is simply to assess your current financial situation, and see if there are any tweaks that can be made to spending and saving, as well as other personal factors, like the interest rate you’re being charged on your loans or the payment schedule that’s set up. Espinal said the interest rates were about five times as high as what she would have been charged if she’d taken out student loans instead, but she didn’t realize that until it was too late.

Strike a balance between spending and saving

Every dollar in a paycheck matters to someone who is living paycheck to paycheck. Although it might seem impossible to part with that money to pay down debt as well as save for retirement and other future goals, it is imperative, Espinal said.

Some people may find they are spending on products and services they don’t actually care that much about — such as one too many happy hour tabs or a superfluous subscription box (it doesn’t always have to be a cup of coffee or avocado toast).

Many financial advisers suggest putting aside 10% (or more) of a salary for retirement, but that’s not always feasible. For people who can’t afford that, Espinal suggests cutting that rate in half. And if that seems impossible, try putting 3%. The goal is to set aside something — anything — even when money is tight. This is especially true when an employee has access to an employer-match, which is essentially free money. In that case, most financial experts will say put at least the amount to meet the full match.

‘Automate, automate, automate’

Making financial decisions can be stressful, especially when there isn’t that much money in the budget — that may lead people to making the less optimal choice. Automating financial decisions, such as saving a set percentage of every paycheck or when to pay off credit card debt, can support good financial habits, said Tim Ranzetta, co-founder of Next Gen Personal Finance, where Espinal works. “It’s hard to set aside money for the future when the current situation feels so urgent,” he said. “Automating it means you don’t even have to think about it.”

The first savings goal should be an emergency account, which can help pay for an unexpected car repair or a trip to the hospital. Eventually, people can use automation to create and build an investment account, Ranzetta said.

Automatic deposits and automatic escalation of retirement contributions has proven to help Americans for decades. Richard Thaler, who received the Nobel Prize in economics in 2017, is credited with helping Americans put nearly $30 billion in their retirement accounts, because of his and colleagues’ research on behavioral finance and auto-enrollment and auto-escalation.

Talk about it

Money isn’t the easiest thing to talk about, but it’s important. Parents can teach their children a lot about finances, as can their children eventually teach them when they’re older. Friends and family members should try being more open about these discussions, which can help in many ways, including knowing they’re not alone in a difficult situation or finding useful advice for a problem.

Opening up about your financial situation can also mean finding an accountability partner, said Joe Buhrmann, manager of financial planning support at Country Financial. Friends can become accountability partners, looking for budget-friendly activities and meals, or emotional support systems.

Look for a side hustle

Not everyone has the time or means to create a side income stream or work another job, but it’s one surefire way to make extra money to put toward debt, and eventually savings. Espinal said she juggled a few jobs to earn more, especially when she was paying down all of her debt. She’d tutor on Saturday mornings, which seemed like a sacrifice when friends were on their way to the beach, but it ensured she’d get to a place where was financially comfortable. “Get creative coming up with income,” she said. “It’s 2019. There are so many ways to find side gigs and hustles.”