How to Detect Scams That Could Ruin Your Retirement

Investing, Investments, Retirement Income, Retirement Planning
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No one expects to fall victim to a financial scam, yet they happen with alarming frequency — and retirees are often in the crosshairs.  

Nearly 1 in 5 Americans over 65 have been victimized by financial rip-offs, according to a 2016 study from the Investor Protection Trust, a nonprofit investor education organization. A 2015 study by True Link Financial, an investment advisory firm, indicates seniors lose $36 billion each year to elder financial abuse.

Investment swindles come in many forms, but no matter the methods, perpetrators have their eye on one thing: your retirement savings. Here are three signs of a swindle that could rob you of your nest egg.

» MORE: Keep savings on track with NerdWallet’s retirement calculator

1. Guaranteed returns

Investing is an inherently risky endeavor, even though many people would have you believe otherwise. Bernie Madoff’s firm sold clients on the investment dream: low risk and high returns. He didn’t mention he was running one of the largest Ponzi schemes in history.

Any investment that offers a sky-high guaranteed rate of return is likely trying to deceive you about the fees and risks you’ll encounter. While it’s always important for investors to be skeptical of new ventures, it’s especially vital when promises ring too good to be true.

Ponzi schemes are a criminal fraud, but some entirely legal investments also can be problematic. Take annuities, for example, which offer a series of fixed payments in exchange for money upfront from the purchaser. Many variable annuities have high expenses and implausible guarantees and don’t make sense for everyone — including low-income individuals and people who are very old or very rich. Yet annuities still are marketed to those groups.

Annuities also are very illiquid, meaning they can’t easily be converted to cash without incurring a big loss. Chris Schaefer, a certified financial planner and head of the retirement plan practice at MV Financial in Bethesda, Maryland, says annuities are one of the most problematic investments for his clients.

“Investors are promised high income with low risk, but we often have to correct someone’s expectations,” Schaefer says. “You have to do your due diligence to understand what the associated risk is.”

2. A sense of urgency

A calling card of suspicious investments is a sense of urgency — which often proves to be false. Perpetrators want to rush investors into a decision so there’s no time for due diligence. But any sound investment that’s here today will be here tomorrow, even if the price is slightly higher.

Such scams include “hot” stock tips and “once-in-a-lifetime” opportunities, both of which usually promise exclusive information that simply doesn’t exist. Then there’s a recent example that used some real information to stir up fears about a fake problem.

A pitch making the rounds this year promised April 10 would bring a “retirement blackout” unless investors acted quickly to participate in a little-known tax haven with potentially big returns: the 26(f) program. The alleged doomsday was actually a deadline for the fiduciary rule to take effect, which was intended to benefit retirement savers. And as for that mysterious 26(f) program? It was apparently a loose reference to mutual funds.

This particular pitch was debunked by several people online, but it’s not always easy to identify a scam. Schaefer urges his clients to call him whenever they receive an opportunity that doesn’t quite add up. “It’s better to be safe than sorry,” he says.

For retirees who’ve managed their finances all along, it can be unsettling to hand over the reins late in life. That’s why it’s important to find a reputable broker or advisor, ideally one who acts as a fiduciary. The Financial Industry Regulatory Authority’s BrokerCheck is a good place to start. This free tool lets users research the backgrounds of financial brokers, advisors and firms.

“Always make sure to verify the license and registration of anyone who is handling your investments,” says Amy Nofziger, director of regional operations with the AARP Foundation.

3. Unsolicited offers

More often than not, investment opportunities appear unsolicited in your mailbox, inbox, online or by phone. The internet is rife with pitches for stocks with little public information, such as microcap or penny stocks, which are prone to fraudulent activity. In April, the U.S. Securities and Exchange Commission charged 27 people and companies with fraudulently promoting stocks online.

Nofziger warns that even seemingly legitimate events — free lunch seminars to learn about retirement planning, for example — often have a catch: a high-pressure sales pitch.

All unsolicited investment opportunities should be considered with caution, but many have an air of credibility — a fancy-looking website or links to news articles, for example. FINRA’s four-question Scam Meter will help investors identify red flags of potential schemes.

The SEC maintains a resource page that lists investments commonly marketed to seniors, including variable securities, promissory notes and ultra-short bond funds. The page also has tips for dealing with unsolicited sales calls.

» MORE: Costly financial fees you might not know you’re paying

Learning from victims

The SEC also offers resources to help retirees report investment fraud. Many people are too ashamed to admit they’ve been victimized, but their experiences can help others avoid these pitfalls.

As you approach retirement, remember the lessons you’ve learned from previous investments: Tempting shortcuts aren’t worth it; the journey requires perseverance. After years of diligent saving, don’t let one bad decision put you on the road to retirement hell.

Anna-Louise Jackson is a staff writer at NerdWallet, a personal finance website. Email: ajackson@nerdwallet.com. Twitter: @aljax7.