Financial Red Flags and Scams to Watch Out For
Retirees, especially those with a recent 401(k) rollover, are prime targets for financial scams and costly mistakes. Your vigilance is your best defense. Here are three major red flags to watch for as you navigate your early retirement.
Red Flag 1: The “Guaranteed High Return” Investment Pitch
Scammers know that retirees are looking for ways to make their money last. They will often pitch complex investments—like private annuities, real estate ventures, or foreign currency trades—that promise high returns with “no risk.” This is the biggest red flag of all. In the world of legitimate investing, return is always related to risk. Anyone promising the high returns of the stock market with the safety of a bank CD is lying.
Warning Signs: Be wary of anyone who pressures you to “act now” before an “exclusive opportunity” disappears. Never invest in something you don’t fully understand, and be extremely suspicious of unsolicited calls, emails, or seminar invitations. To protect yourself from scams and for consumer information, consult the Consumer Financial Protection Bureau (CFPB) and the FTC.
Red Flag 2: Ignoring the Tax “Torpedo”
One of the most common senior mistakes is underestimating the impact of taxes in retirement. When you withdraw money from a traditional 401(k) or IRA, that money is taxed as ordinary income. A large withdrawal to buy a car or pay for a home renovation can easily push you into a higher tax bracket for the year. But the trouble doesn’t stop there. Your total “provisional income” determines whether your Social Security benefits are taxed. If your combined income (including half of your Social Security benefits and your retirement account withdrawals) exceeds certain thresholds, up to 85% of your Social Security benefits can become taxable.
For example, if you are a married couple filing jointly and your combined income is over $44,000, you will likely pay taxes on a portion of your benefits. A large, unplanned withdrawal can trigger this “tax torpedo” and significantly increase your overall tax bill. Federal tax information is at the IRS.
Red Flag 3: Underestimating Your Own Longevity
It can feel pessimistic to plan for a long life, but it is a financial necessity. A surprisingly common mistake is building a financial plan that only lasts until age 85. With modern medicine, it’s very possible for one spouse in a healthy couple to live into their 90s. If your financial plan assumes your money only needs to last 25 years but you live for 35, those final years can be incredibly difficult. Always stress-test your plan for a longer lifespan, even to age 95 or 100. It’s far better to leave money behind than to run out of it.
