During my days investigating fraud and financial crimes as a detective, I saw so much criminal, financial abuse toward the elderly, that I had to share this important article. The unfortunate thing was that more often than not, there was little that could be done after the fact to recover the lost assets. And what is often unspoken, is that much of the fraud is from within the family. If you have a love one, read this guest post, watch for the signs, and do not hesitate to intervene if you suspect something isn’t right.

Enter Judy A. Stewart, CFP® and Marcie Grube Carlsbad, CA

Senior financial abuse is a chord that strikes close to home. My 88-year-old mother lives alone, and I worry that she could be vulnerable.

The financial exploitation of seniors is very prevalent. According to the North American Securities Administrators Association (NASAA), Investor Protection Trust (IPT), and the National Adult Protective Services Association (NAPSA):

• Half of older Americans exhibit at least one sign of current financial victimization.
• Almost half of those aged 65 or over (44%) got at least two of four questions wrong about basic investment knowledge.
• About one of three older Americans (31%) say they are vulnerable in one or more ways to potential financial victimization.
• Only 2% of Americans 65 or older say their health-care provider has ever asked, “How you are handling money issues or problems?”
• Four of 10 children of parents age 65 or older are “very” or “somewhat” worried that their parents “have already become or will become less able to handle their personal finances over time.”

Sounds scary, doesn’t it? Fortunately, some people are taking action. The NASAA, IPT, and the NAPSA, along with medical professionals and social workers, are banding together to create the Elder Investment Fraud and Financial Exploitation project, whose job is to stop a “rising tide of economic exploitation of the elderly” (Kristof, Los Angeles Times, June 20, 2010).

Sheryl Rowling, of Total Rebalance Expert, highlights the three most common ways a senior might be exploited:

• Telemarketing scams: More than a third of telemarketing fraud victims are over 60 years old. The most common scams are free vacation packages, time-shares, sweepstakes, phony charity fundraisers, and expensive 900 numbers.
• “Free lunch” investment seminars: Shady financial advisers often lure seniors to a free lunch or dinner, promising advice on “senior” issues such as living trusts or estate planning. Once there, seniors are pressured into purchasing dubious investments such as annuities or promissory notes. Although technically legal, these products are monumentally bad choices for retirees—illiquid, complicated, and booby-trapped with high fees.
• Religious or social group fraud: Among con artists’ favorite targets are members of close-knit religious or social groups. The con joins the group and then tries to sell fraudulent investment schemes to members. (Sheryl Rowling, “Beware Senior Financial Abuse,” June 10, 2010)

What can you do to prevent senior financial abuse in your family? Rowling suggests family members simply sit down and discuss their financial concerns with their senior relatives. Of course, this can be a sensitive subject for seniors who want to remain independent. Calmly reviewing best practices can be a good reminder for seniors.

• Documenting financial arrangements can prevent misunderstandings. Review estate plans and wills every few years with senior family members.
• Encourage senior family members to stay active in their community. If they know where to turn for help, they’ll be less likely to be exploited.
• Check references of those who help seniors in and around their homes. This can protect against con artists looking for an easy target.
• Don’t give out personal information such as ATM or credit card numbers, PINs, or Social Security numbers.

Most importantly, be engaged in the lives of senior family members. Ask about their acquaintances and friends. Con artists look for victims who are lonely and isolated. Seniors who are active and who have family and friends looking out for them are less likely to be targeted for financial abuse.

If you suspect a parent or other aging family member or friend might be a victim of financial exploitation, a counselor or financial advisor can provide expertise in a sensitive and potentially serious situation.

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This morning I opened my email inbox and found the same email of the City Council Agenda forwarded to me by six people. I never receive such emails, but I was asked my view of the proposed police officer retirement benefit changes.

This is an important issue for the cops, but the lesson affects all of us non-police officers. Their retirement benefits are going to be cut and this is only the beginning of a much larger trend. I predicted this over five years ago after closely following the economics and politics at the State level here in California, but the trend will be nationwide.

Briefly I will explain what is happing in Santa Maria as an example of what will become a larger trend. It is important we understand this example because it will explain where we will ultimately end up, how it affects the rest of us, and what you need to do to protect yourself.

Santa Maria, CA

In the City of Santa Maria, and many other California cities, police officers participate in the CalPERS 3% at 50 defined benefit retirement plan which provides an officer who has 30 years of service with a retirement benefit of 90% of his salary in retirement for the remainder of his life.

To employees and business owners in the private sector, these benefits often seem generous, but it’s important to understand how these benefits are paid for. CalPERS retirement benefits are funded through contributions paid by employers, employee contributions, and earnings from CalPERS investments.

In the Santa Maria Police Officers’ example, the City is responsible for contributing about 23% of the employee’s salary to the CalPERS pension plan and each employee is responsible for contributing 9%. But though salary negations, the City agreed to pay the employee’s 9% contribution if the officers agreed to forgo cost of living raises that keep their salaries in line with inflation.

It costs the officers a total of 32% of their salary to fund their pension. The important point that officers and the public often miss is that the generous pension plan the officers receive is NOT free.  Whether the officers pay it directly, or the City pays, their pension ultimately costs them a 32% reduction in their pay. How many people in the private sector save 32% of their salary—not very many.

Police Officer Wage

Many in the private sector argue police officer pay is inordinately high. Police officers, particularly in California, do earn a decent living for a job only requiring a high school education. But that ignores the incredible physical dangers, the legal liability, and the mental and emotional toll the officers endure during their careers.

It’s also important to consider that only a very small percentage of officers that begin the careers, actually complete 30 years. The majority leaves early due to stress, injuries, or less than perfect behavior that in any other career wouldn’t be a factor.

In every profession, the laws of economics determine wages. There is a reason the U.S. law enforcement wage market is higher than in most third world countries. Our society values a strong rule of law and pays a premium for it, and as a result, there is generally less crime and corruption.

Times are changing

Governments at all levels have overspent and pension plans such as CalPERS have used overly optimistic stock and real-estate market forecasts. Now that we are in a deep recession, the investments used to pay the retirement benefits are not earning what they used to, so CalPERS is raising the percentage that employers must pay to maintain the same level of retirement benefits.

As a result, Cities are looking for ways to fund the increased cost of retirement benefits and make up for lost tax revenue. In the City of Santa Maria example, they are taking several steps which led to the emails I received today. First they are proposing that new employees pay the 9% contribution instead of the City footing the bill. This will result in a two-tiered retirement plan where new employees have different benefits than older ones.

But this is only the beginning and eventually police officer’s will lose all of their defined benefit pension plans. This is shocking to many, but as I said previously, I’ve predicted this for over 5 years. It’s so predictable because the majority of the U.S. work force no longer has defined benefit plans. They do not have retirement plans with guaranteed retirement benefits that are predetermined 30 years in advance.

Instead most employees have what are called self-directed retirement plans where the employee contributes and manages their own investments. Many are familiar with 401(k) or IRA plans. And since most people do not have pension plans, they’re not pleased when others have guaranteed benefits, especially when they’re funded with tax payer dollars.

History is repeating itself over and over which make this very easy to predict. This first happened to the American auto industry which was almost wiped out because of expensive retirement plans. I followed that closely in the news, but then went through it personally in my early 20’s in the grocery business. In grocery, they started out exactly as the City of Santa Maria is until ultimately pension plans were eliminated.

The private sector was hit hardest and first as a result of global competition. It has just taken government longer to feel the impacts because government is in essence a monopoly—they have no competition.

But even though government has no competition, they haven’t been able to maintain their runaway spending through this deep recession.  The recession is not something I even tried to predict, but it’s just accelerating what was already politically going to happen.

What To Do

The first step is to accept that police, or any other pension plans, are eventually going away. Period! There is nothing you can do to change that. That doesn’t mean that your unions shouldn’t fight to slow the process.  It never hurts to continue negotiating for more benefits.

But ultimately, that will be a losing battle and it’s important to take control of your own finances. You cannot allow yourself to become the victim of circumstances, but instead take charge by planning your retirement.

You need to do two things. The first is to find a second source of income. Follow your passions and turn hobbies into second jobs or passive incomes. And if you don’t currently have the skills you need to follow your passion, it’s time to start educating yourself through school or self study so you have a second source of income, or at the very least, another option if you need it.

The second step is to educate yourself on retirement plans and get started investing on your own. Empower yourself to create your own retirement benefits, that you control, so you are no longer at the mercy of your employer, especially when I’m telling you where this is heading.

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Most people have no idea how much their mutual funds in or outside of their retirement accounts cost. If you’re like most people, you probably don’t know you’re being charged hundred’s or thousands of dollars each year, but you are.

Learn what you’re charged for load and no-load mutual funds. Lower expenses can make a difference of thousands of dollars in your investment accounts.

This video makes load, no-load and expense ratios simple to understand. By the end of the video, you will know the basics of expenses you’re mutual funds charge you.

No Load mutual funds fee-only financial advisor

2010 is an interesting year for Roth IRA’s because there are changes in the law that may really benefit you.

Being that it’s fall, this is a good time of year to evaluate if a Roth IRA conversion is good option. You may be able to take advantage of the new laws or perhaps even a negative tax bracket with the economic challenges.

If you’re not aware of those new rules, you should ask your adviser or do some research because you may be able to save a lot of money.

Guest Author:

Jo Anne Paynter wrote a timely article explaining some of the most interesting benefits of Roth conversions by looking at three numbers: investment years, marginal tax rate, and tax drag.

Investment Years

What are your plans for the account you’re going to convert to a Roth? Will you to tap it as an income source during your and your spouse’s lifetimes? Or do you want to pass it on to your children or grandchildren?

Depending on your longevity, you could have quite a few investment years ahead of you. The number of investment years describes how long the account will be able to accumulate value.

A 45-year-old investor (who happens to be converting an IRA to a Roth this year) could very well live to age 85. In those 40 years, a $10,000 Roth conversion, left untapped and earning 7.5% per year, would grow to about $180,000. If left to grow to age 95, the value would reach about $370,000.

The accumulation doesn’t have to stop there. Because Roth accounts aren’t subject to Required Minimum Distributions (RMDs) until after the original owner dies, you could let it continue to grow, taking nothing for yourself and leaving it to your children or grandchildren. The number of investment years would then extend for the remainder of your life, plus the number of years your beneficiaries live on. You might be creating an account that will grow for more than a century!

Of course, once the beneficiaries receive the account, they are required to take out RMDs over their lifetimes. But these distributions start out as fairly small compared with the growth of the account. For instance, a 25-year-old beneficiary needs to take an RMD of only about 1.72% of the account balance, leaving the remainder to grow until the next year. A 35- or 45-year-old would need to take only about 2.06% or 2.58%, respectively. This leaves the great majority of the account untapped, accumulating value for your beneficiaries.

Marginal Tax Rate

You may know that for your traditional IRA, you must take your own RMD when you reach age 70½. (Beneficiaries must take RMDs no matter what their age.) These distributions are taxed at the recipient’s marginal tax rate, the income tax rate applied to additional income they receive.

But distributions from a Roth account aren’t taxable (assuming you’ve met all the requirements, like the five-year holding rule and being at least age 59½). Roth assets don’t require RMDs from the original account owner, and it’s nice to have a Roth account to dip into for an unexpected expense. Whether you have a chance to take a trip or you need to deal with an emergency repair, you don’t have to worry about the tax consequences of taking a Roth distribution the same way you do for a traditional IRA.

If it’s your heirs who will be taking the distributions—and they will be required to take RMDs—the non-taxability of these distributions can be especially beneficial. If the kids or grandkids have been successful in their own right, they could be in the top income tax brackets.

For 2010, this means a Roth distribution saves the beneficiary up to 35% in federal tax, compared with having to take money from a traditional IRA. These savings would only increase in 2011 when the tax reductions put in place in the early 2000s expire and the top tax bracket jumps up to 39.6%.

And that’s just for federal income tax. Traditional IRA distributions can be subject to state tax as well. Although future income tax brackets are impossible to predict accurately, we can be quite sure we’ll be glad to have assets to draw on that won’t increase our tax liability or that of our beneficiaries.

Tax Drag

Closely related to marginal tax rate is tax drag, the tax cost associated with assets that could be put into a Roth account.

For instance, suppose you are in a fairly high tax bracket (perhaps 28% in 2010, which will be going up to 31% at the start of 2011). You may have assets that generate interest, or unqualified dividends, or capital gains. Those streams of income create tax liability each year at your marginal tax rate or capital gains tax rate, as the case may be. That part of your tax bill from the IRS (and the state, if applicable) is the tax drag on your net investable assets.

The new federal health-care legislation will only magnify tax drag for some investors. Beginning in 2013, the law imposes an additional 3.8% tax on all unearned income for high-income earners (those earning more than $200,000 per year for single taxpayers or $250,000 for married couples).

That means additional tax on rents, royalties, dividends, capital gains, interest, and annuities. So your tax drag will grow as your taxable assets grow. Using a Roth could shelter future retirement distributions from taxation, reducing tax drag and thereby enhancing overall investment performance.

These three numbers—investment years, marginal tax rate, and tax drag—have something in common: we don’t have direct control over any of them. Like many aspects of personal finance, we often need to make decisions without being able to completely predict the outcome.

Roth conversion decisions bring with them lots of possible issues that can affect families in different ways. Your advisor can help you evaluate how these three numbers affect your Roth conversion plans.

Jo Anne Paynter, CFP®   is a financial planner in  Grove City OH and a member of ACA.

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If you’ve followed my writings for a while, you may have noticed my slant on financial planning is less about money and more about a rewarding and satisfying life.  Money is a necessary part of life, but not the purpose of it.  Sometimes we get so focused on earning money, that we forget what that money is for.

Here is a tale that always brings me back to reality when it’s easy to miss the forest for the trees.   I’ve seen this many places so I don’t know who credit as the original author.

It had been almost two years since the American businessman, with an MBA from a prestigious Ivy League school, took a vacation.  He had a very important role as a business advisor at a Fortune 500 consulting firm.  While vacationing in Mexico, he met a Mexican fisherman with a small boat who’d just caught a lot of fish.  Impressed by the Mexican’s catch, the American began talking with him.

It was only 2:00 in the afternoon, so the American asked the man why he was coming in from fishing so early.  The Mexican said he had enough fish for his family and friends and had no need for more.  He continued by saying he wanted time to take a siesta, play with the kids, and have his neighbors over for dinner and dance.

The businessman proudly told the Mexican that if he worked longer he could form a corporation, buy more and larger boats and expand the company by exporting fish out of Mexico.  He continued by saying that after about 20 years the company would be large enough to sell for millions of dollars.

The Mexican was impressed by this idea and asked what he would do next.  The American said “that’s when all the hard work will pay off.”  He could sell the company, retire and live on the beach, spend his time doing a little fishing, playing with the kids, and enjoying dinner and dance with friends.

What do you think?  Does this make you reconsider what you are doing?  It serves a good reminder to me every time I read it.

I invite you to find out more by visiting http://www.cjrylantwealthmanagement.com and download the FREE workbook, 7 secrets to Financial Independence.

Chuck Rylant, MBA, CFP^©

C. J. Rylant Wealth Management

Photo: www.flikr.com

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Retirement plan rules are incredibly complex and change frequently, but for most plans like the 401K and IRA, you won’t pay income taxes on the money you contribute until you withdraw it.  So, for example, if you earned $65,000 from your employer and contributed $5,000 to your 401K plan, you would only pay income tax that year on $60,000 of income.  This is an oversimplified example, but it helps illustrate the idea.

Now let me explain the other investments in the question.  The money you contribute to the retirement plan can be used to buy many different kinds of investments.  These can range from investing in a small business to buying stocks, bonds, CD’s or mutual funds.  The retirement plan is just a basket that holds money that you use to buy investments, but it has great tax benefits.

Now on to the original question of which is better.  No one is better than the other, it’s a matter of timing and making sure you have the right mixture of investments to fit your needs at the time.  The IRS generally imposes stiff penalties for withdrawing money from retirement plans before age 59 ½, so if you may need (notice I did not say will need) the money sooner, you should probably eliminate those plans as an option.

Then you need to decide which investments to buy either within or outside the retirement plan.  Here again it’s a matter of how soon you’ll need the money. Generally if you’ll need the money within five or fewer years, stocks are probably not the best way to go and a CD, money market or short term bond are more appropriate.  When your time line is five or more years away, stocks become a better idea.

At the risk of completely complicating things, mutual funds are investments that buy all of the investments we’ve discussed so far–stocks, bonds, real-estate, and CD’s. So you really need to examine what the mutual fund is invested in to make an informed decision.

I’ve tried to tackle a whole range of complicated topics and give you a basic idea of “which investment is best.” Obviously there are entire books on these topics, but hopefully you have a better idea of the difference between an investment (stock, bond, CD and mutual fund) and a retirement plan (401K and IRA) so you can get closer to your own retirement.

There are many different ways advisors are paid in the financial services industry. For the sake of this brief article, I will broadly categorize all of the fee structures into three categories. They are Commissions, Fee-Only and Fee Based.

Commissions

The traditional and most common way fees are charged is through commissions. Commissions are typically paid when an investment or insurance product is either bought or sold. Commission based advisors do not get paid unless you buy or sell something. If you believe you do not pay fees to your insurance or investment advisor, than you most likely work with a commissioned advisor that receives a percentage of each transaction.

Fee-Only

The Fee Only model is the newest payment structure on the block. There are different ways Fee-Only advisors are paid. Fees may come from a flat annual retainer, by the hour, or a flat annual fee based on a percentage of your investment assets. Fee-only advisors do not receive any commissions or kickbacks from the investment products they recommend. Fee-Only advisors tend to be more comprehensive and objective because they are paid the same regardless of which investments you choose.

Fee Based

Fee Based advisors are a hybrid of the Commission and Fee-Only model. Fee Based advisors are commonly mistaken for Fee-Only, however, there is a distinct difference between the two. The Fee Based advisor receives commissions for products sold, but also charges an additional fee for advice. In contrast, Fee-Only advisors don’t receive any compensation from insurance or investment products sales.

So which is best?

As objective as I’ve tried to be in this article, I’m a Fee-Only advisor so I’m obviously biased. As in any industry there are good and bad people in each of the categories. Your job is to understand exactly what you’re paying and what you get in exchange for that fee. Each of the three fee structures has advantages and disadvantages to both the advisor and the consumer. There is not enough space in this article to cover all the pros and cons, but I encourage you to learn more and then choose an advisor with a fee structure that is most likely to put your interests first.

Part of the frustration with credit card debt is the trapped feeling you get. Every time you make a payment, only a small portion of the payment goes toward the principle. This is because of their ridiculously high interest rates. So to get out of this cycle you need to take two steps; stop making credit card purchases and increase the amount of your payment that goes toward the principle. Those steps are rather obvious, but with today’s economy it may be tough so I’m going to share a very simple secret that may help.

Call each of your credit card companies and simply ask for a lower interest rate. It’s that easy. If your payments are current they will probably lower your rate several percentage points just for asking. If they are reluctant you may have to remind them of the many better offers you receive every day in the mail. Many of my clients have had a lot of success doing this and I think you will as well. So pick up the phone tonight and just ask. Your next credit card bill may be just a little lower for the effort.

An HSA is a tax-exempt account you use to pay for certain medical expenses. If eligible, you may claim a tax deduction for contributions to the HSA account even if you do not itemize deductions. Another benefit of the HSA is that medical expenses that are otherwise not deductible can be paid for with tax deductible funds. For example, the Treasury Department has said over the counter drugs such as “aspirin” are eligible expenses.

Unused contributions remain in the account and the interest or earnings grow tax free. HSA investment options are very flexible and range from money market funds to stock market mutual funds. Most HSA custodians provide check writing and debit cards making it very easy to use the accounts.

The combination of the HSA and the HDHP is not appropriate for everyone, but it’s a perfect example of the benefits of comprehensive financial planning. By taking advantage of the HSA tax benefits, selecting appropriate investments, and choosing a compatible insurance plan, you can drastically reduce your health insurance costs.

Retirement on Hold – FA Magazine