4 Things Retirees Are Told To Buy But Costs Them Money, According to Kevin Lum
Written by
Kathryn Jackson
Edited by
Zuri Anderson
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Retirees are often told they need more things, more insurance, more upgrades, more “just in case” purchases.
But according to Kevin Lum, certified financial planner (CFP), many of these recommendations can drain savings without adding real security or value. Knowing what to skip can be just as powerful as knowing what to buy.
Life Insurance
Lum pointed out that when buying insurance, a good question to ponder is, “What is the insurable interest?” He went further and said that life insurance exists to replace income for dependents, and for about 90% of retirees, they often buy it solely for peace of mind, not because they really need it.
Life insurance is designed to replace income for people who depend on you financially. In retirement, whether it still belongs in your plan depends on who, if anyone, is counting on that income.
Variable Annuities
What most people don’t realize is that they will often end up paying fees of anywhere up to 3% or 4% a year for an annuity, Lum said.
Variable annuities are frequently pitched as safe and guaranteed, but there’s a catch: They come loaded with fees which can slowly chip away at your money, according to Employee Fiduciary. These particular fees, often referred to as “wrap fees,” are rarely obvious. They’re tucked inside expense ratios and insurance contracts, making them easy to miss, even for experienced investors And over time, what looks like a minor charge can easily siphon off tens, or even hundreds of thousands of dollars from your savings.
Overpriced Active Mutual Funds or ETFs
Lum recommends if his viewers are paying a high expense ratio on an exchange-traded fund (ETF) or mutual fund, they should reevaluate by asking, “What purpose does that fund show?” He also said that, in general, it is best to keep the expense ratio as low as possible on the funds used.
Morning Star suggests that retirees keep in mind that when looking at ETFs, index funds or others, low costs and tax efficiency are best but also that cash flow extraction and ease of oversight are important, too. Once retirees need their portfolio to provide a cash flow for living expenses, they should keep investment-related costs low so that a larger share of the returns flow back to them.
Extended Warranties
Lum said that Consumer Reports found that most people who purchase extended warranties spend more each year on the warranty than they would receive in claims. Skipping the warranty and boosting your emergency fund would be a better idea.
Extended warranties can push coverage out to three or even five years, per financial services ministry MMBB. The problem is that many appliances never fail during that window. And when something does go wrong, the repair often costs less than the warranty itself. Add in the fact that some credit cards already extend protection, and that extended warranty starts to look unnecessary. Before agreeing to the cost of an extended warranty at the register, take a moment to see what kind of coverage is already in place.
For a vehicle extended warranty, be sure to examine the fine print to check for deductibles, denied claims and what repairs are not covered before committing. If the car is known for high repair costs, or if the car will be kept for a long time, then an extended warranty may be needed.
All in all, Lum told his viewers that the most successful retirees know that buying more things is not the answer. Instead, it’s to have a plan. He stressed the fact that if there is not a clear explanation of how something makes money, then it is best not to invest in it.
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