September 30th, 2011
If you are retired or in the process of planning your retirement, you should be wary of potential retirement scams that could impact your finances. If you rely on the equity in your home for a reverse mortgage and get appropriate counseling from a reverse mortgage expert, you can feel more secure in your ability to handle financial emergencies.
The Financial Industry Regulatory Authority (FINRA), an independent group that monitors securities and investment brokers, offers several tips for avoiding a retirement scam. One of the most common scam scenarios is for a broker to recommend early retirement to you, suggesting that you cash out your retirement account and have the broker invest your money for you. While a promise of a high rate of return on your investment may be tempting, the broker can end up putting your money at risk.
Reverse mortgage for income
Rather than rely on the advice of an unscrupulous broker, you may want to consider the benefits of a reverse mortgage. Available only to homeowners age 62 and older with either a paid-off mortgage or significant equity in their home, a reverse mortgage can be used in several ways to ease the financial pressure of retirement.
• Pay off your existing mortgage. You can use your reverse mortgage to eliminate your existing mortgage, thus freeing up cash for saving and spending.
• Establish a line of credit for emergencies. If you don’t need the money right now, you can set up a line of credit that gives you the peace of mind that you’ll have the cash for an unexpected home repair or medical bill.
• Generate a lump sum to pay off debt or make home improvements. If you have credit card debt or want to increase the value of your home or add features to allow you to age in place, you can use the reverse mortgage proceeds to help defray those costs.
• Create cash flow with monthly income. You can opt for a monthly payment from your reverse mortgage to help you keep your spending plan in balance.
Early retirement scam tips from FINRA
Whether or not you opt for a reverse mortgage, you should be wary of brokers who promise the following for your retirement:
• Anyone can retire early. You need to have the savings to support you for the long term in retirement, so make sure you independently verify your ability to sustain yourself in retirement.
• You can earn as much in retirement as you do today. This would require unrealistically high investment returns and perhaps large withdrawals that would be unsustainable.
• You can expect returns of 12 percent or more. Not only is predicting returns on investment extremely difficult, but anything with that high a return would likely be a high-risk investment.
• You can withdraw 7 percent or more annually. A sustainable retirement requires savings and investments for income and a conservative withdrawal pattern. According to FINRA, many financial experts recommend you withdraw only 3 to 5 percent of your retirement fund, especially during the first few years you are retired.
FINRA also says you should beware of these potential signs of fraud:
• Pushy salespersons
• Unregistered products
• Guaranteed investment returns
• Complex strategies
• Promises of overly consistent returns
• Missing documentation
• Account discrepancies
You can check on a broker’s credentials at FINRA BrokerCheck. You should also consider getting a second opinion before you decide to retire early or make any major financial decisions, including taking out a reverse mortgage.