Category: Retirement

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How to Identify Financial Scams & Investment Schemes

An old proverb claims, “The art is not in making money, but in keeping it.” Unfortunately, con artists and swindlers are anxious to separate you from your money by means of deception and fraud.
 
In an interview with BBC Future, Dr. Eryn Newman of the University of Southern California said a positive story that “feels smooth and easy to process” is easy to accept as truth. Con artists are particularly talented in creating believable lies. Falling for their tricks costs U.S. citizens billions every year.
 
According to Anthony Pratkanis, “Every year, Americans lose over $40 billion in telemarketing, investment, and charity fraud.” However, this amount may be vastly understated because instances of fraud are likely under-reported. According to the Financial Fraud Research Center, up to 65% of victims fail to report their victimization. They typically do not tell the authorities because they lack confidence in the police and the likelihood of restitution. Many are embarrassed by their gullibility.
 
But in her interview, Dr. Newman claims that gullibility – the tendency to be duped or manipulated by one or more people – does not reflect intelligence. Anybody can fall prey to a financial scheme or scam. Therefore, your best line of defense is to have a thorough understanding of how con artists operate – and how to spot them before they take advantage of you.

The Players

Marks

Victims of scams – known as “marks” – are often fooled when they hope to get something for nothing or very little. Other victims – often the elderly – may be susceptible due to their good intentions and desire to help others.
 
While many believe that the typical victim of an investment scam is older and less educated than the general populace, the Financial Fraud Research Center reports that this stereotype is false. The average investment fraud victim is “more likely to be male, relatively wealthy, risk-taking, interested in persuasive statements, open to sales situations, and better educated than the general public.” Martha Deevy, director of the Stanford Center on Longevity’s Financial Security Division, stated in an interview with the American Psychological Association that the typical investment fraud victim is a middle-aged, married, educated, financially literate white male under some financial strain.
 
Dr. Stephen Greenspan has spent more than a decade studying the problem of gullibility. In the The Wall Street Journal, Dr. Greenspan names four distinct factors that make a person more susceptible to being duped:
 
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How to Fix the United States’ Debt Problems & Reduce Federal Deficits

federal-debt-18 trillionAccording to projections by the Congressional Budget Office (CBO), America will continue to spend more than it receives in revenues from 2016 to 2026, and perhaps beyond. The budget deficit is projected to be slightly below 3% of gross domestic product (GDP) through 2018, then rise to 4.9% by 2026.
 
If the CBO projections are accurate, the federal debt will grow another $9.4 trillion by the end of the 10-year period, with potentially dire consequences for the country. According to the authors of the report, “The likelihood of a fiscal crisis in the United States would increase. There would be a greater risk that investors would be unwilling to finance the government’s borrowing needs unless they were compensated with very high interest rates; if that happened, interest rates on the federal debt would rise suddenly and sharply.”
 
Higher interest rates—averaging 2.3% in 2014 and 2015, as reported by TreasuryDirect—on an increasing amount of debt are likely to cause a “crowding out” effect, according to the Federal Reserve Bank of St. Louis. As the Federal Government borrows more money to pay its bills, there is less capital available for the private sector.
 
Many believe that the CBO’s concern is understated. In his testimony before the United States Senate Budget Committee February 25, 2015, economist Dr. Laurence J. Kotlikoff of Boston University bluntly stated, “Our country is broke. It’s not broke in 75 years or 50 years or 25 years or 10 years. It’s broke today. Indeed, it may well be in worse fiscal shape than any developed country, including Greece.” Kotlikoff claims that Congress has “cooked the books” for years, and that the difference between the present value of all projected future government expenditures less the present value of all projected future receipts was actually $210 trillion in 2014, more than 16 times the actual reported debt.
 
Whether or not economists agree on the appropriate level of the federal debt, there is agreement that the only way to reduce annual deficits and pay down the debt is for the government to Collect more than it spends – an unlikely (if not impossible) result in today’s political atmosphere. Only six times between 1960 and 2015 has the Federal Government spent less than it collected, according to the Office of Management and Budget. Most recently, in 2015, the Federal Government collected $3.25 trillion in taxes, almost 60% from income taxes, while spending $3.69 trillion. As a result, the budget deficit of $439 billion—the lowest deficit since 2008—was added to the federal debt.
 

The Myth of Economic Growth as a Solution

Politicians regularly suggest that the deficit problem can be resolved as the economy improves because revenues through taxes naturally increase as incomes rise through stronger growth. Such thinking encourages postponing actions that are politically unpopular, such as raising taxes or cutting popular programs.
 
Hoping that economic growth can solve America’s problems is likely futile for the following reasons:
 
GDP Growth Is Projected to Be Lower Than in the Past. According to the CBO’s Budget and Economic Data, annual growth averaged 3.2% to 3.3% from 1974 to 2001, 2.7% from 2002 to 2007, and 1.4% from 2008 to 2015. While the economy is recovering, the CBO projects average annual growth from 2016 to 2025 at 2.0%, well below the average prior to 2008.
 
Widening Income Disparity Threatens Economic Growth. The trickle-down theory was discredited by a 2015 International Monetary Fund report, which indicated that when the rich get richer, no others benefit and growth slows. The data from more than 150 nations suggests that when the richest 20% of a society increases their income by 1%, the annual rate of GDP growth shrinks by nearly 0.1% within five years.
 
Costs for the Major Entitlement Programs Will Rise Sharply. The aging population, rising healthcare costs per person, and increased costs of the Affordable Care Act are likely to boost federal spending for Social Security, Medicare, and Medicaid if current laws remain unchanged. As Kotlikoff testified, the estimated 76 million members of the Baby Boomer generation are already entering a period where each recipient will Collect “$40,000 in Social Security, Medicare, and Medicaid benefits each year.” As a consequence, the largest group of people to put money into the system – the Boomers – will begin taking it out. Left unchanged, Social Security will begin using its surplus funds to pay benefits in 2017 and deplete reserves by 2034.
 
Interest Costs on Federal Debt Will Triple in the Next 10 Years. According to CBO projections, net interest costs for the federal debt are projected to more than triple from $223 billion in 2015 to $772 billion in 2025.
Projections Do Not Include the Costs of New Wars for Defense Against Terrorism. The Watson Institute of Brown University estimates the costs to date of the wars in Afghanistan, Pakistan, and Iraq at $4.4 trillion, all of which were funded by borrowing. Some analysts estimate the costs of the three wars even higher. The cost of future defense is unknown, but likely to be as high as – if not higher than – past wars.
 
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Fractional Ownership for Vacation Homes, Planes & Boats

oceanfront-townhouses-918x516Have you ever dreamed of owning a vacation home in Pebble Beach, California or a mountain château in Aspen, Colorado? Rather than fighting security lines at the airport, perhaps your dream is to drive up to your plane and go wherever you want, whenever you want.
 
Pleasures once thought to be enjoyed only by the very rich – vacation homes, aircraft, and yachts – are possible for more people today. While the expense of ownership always exceeds the cost of renting a luxury residence for a limited period, the benefits of having one’s place—familiarity and convenience—can outweigh financial considerations. The best thing about owning an asset is that it is always there when you want to use it.

Timesharing Is Not Property Ownership

Many confuse collectively owned or fractional share ownership with timesharing. The two are vastly different.
 
In 1974, the Caribbean International Corporation (CIC) offered the first timeshare program in the continental United States. Rather than owning the property itself, interested parties could buy the right to use a one- or two-bedroom condominium in the U.S. Virgin Islands for one week each year. The term of the timeshare agreement was 25 years. Each unit offered 50 one-week shares, with the remaining two weeks each year used for maintenance and repairs.

While critics complained that property sold as timeshares was frequently overpriced, this new financing method proved popular with customers who sought to return to the same site each year. Unfortunately, when sales abuse became common, many countries established regulations over the sale and management of timeshare properties. In the United States, individual states enacted a 10-day cancellation period for any reason applying to new contracts in the event of “buyer’s remorse.”
 
Although the FBI issued a special report in 2012 about timeshare scams, the concept remains popular with consumers. According to the American Resort Development Association, there are currently more than 5,300 resorts in nearly 100 countries owned by more than 9 million timeshare owners today.
 
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10 Best U.S. Cities to Live Without a Car

biketoworkAccording to the 2015 edition of AAA’s Your Driving Costs, the average annual cost to own and operate a vehicle in the U.S. is $8,698. This includes fuel, maintenance, tires, auto insurance, license and registration fees, taxes, depreciation and finance charges – but not the cost of vehicle storage or parking your car at a meter.
 
Even a small sedan like a Honda Civic or Ford Focus can set you back $7,606 annually, while a large vehicle like a Ford Explorer or a Jeep Grand Cherokee has a yearly expense of $11,931. The cost of owning and operating a single car can exceed the monthly food costs for a family of four, while operating two cars in a family can generate costs greater than the average mortgage payment in the United States.

Benefits of Car-Free Living

Aside from the considerable monetary savings of being automobile-free, there are many other advantages:

Less Environmental Pollution

According to the U.S. Environmental Protection Agency, operating automobiles is the single greatest cause of air pollution. Pollution results from the combustion process and spills hydrocarbons, nitrogen oxides, carbon monoxide, and carbon dioxide. According to the EPA, carbon dioxide is considered the primary greenhouse gas contributor to recent climate change. Automobiles are also major causes of of smog and acid rain.

Increased Personal Safety

According to U.S. Census data, there are approximately 11 million automobile accidents each year. The National Highway Traffic Safety Administration states that this results in more than 30,000 deaths, 2.3 million injuries, and, according to a separate report by the NHTSA, an almost $1 trillion cost of productivity and loss of life. Living without a car dramatically reduces the likelihood of death or injury related to cars, as pedestrian deaths are far more unlikely than those of car drivers or passengers.

Better Health

Without an automobile, people increase the time and distance they walk each day when commuting to and from work or when shopping. Health authorities from the American Heart Association to the Arthritis Foundation recommend daily walking as the key to long-term health. The benefits can include weight loss, longer life, better sleep, and reduced Alzheimer’s risk.

Less Stress

MIT’s Sensible City Lab and automaker Audi did a study on driving and learned that stress levels for driving in city traffic and skydiving from an airplane for the first time were about the same. Karl Greco, one of the project leaders, claims, “Certain driving situations can be one of the most stressful activities in our lives.”
 
A 2014 article in TIME magazine noted several studies about drivers who commute more than 10 miles each way to work and the deleterious effects upon their mental and physical health. John Casada, a psychiatrist who specializes in anger issues, says, “Sitting in traffic all boxed up in your car, running late and feeling powerless to improve your situation, is a perfect recipe for stress… As our society spends more time commuting amid more and more traffic, it’s no surprise that rates of aggressive driving and road rage are on the rise as well.”
 
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