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Don't fall prey to 'pension loans'

| Thursday, May 2, 2013, 12:01 a.m.

The success of all financial planning begins and ends with the individual.

If someone cannot control their spending or has no discipline about finances they will never be a financial successful. In fact, they may need to be protected against themselves.

One example of this might be income tax refunds.

A disciplined person should want to receive a small income tax refund; this is because the government does not pay interest on this money. A non-disciplined individual should try to get a large refund because this may be the only way that they can save.

Because of this difference, financial advisors must get a feel for their clients before they know what type of advice to offer.

There are many kinds of financial scams out there. The New York Times recently reported on one targeting retirees. These are loans against pensions. Most often targeted are former government employees or military personnel. This is because they are one of a few groups that receive a pension. Most private employers eliminated these years ago.

We discussed last week that market losses at the beginning of retirement are much more serious than losses at the end of retirement.

Many current retirees are finding themselves in a difficult position. Their investments outside of the government pension have not been earning much and housing values have plummeted. The slow economic growth has made it hard for many Baby Boomers who lost their jobs to find a new one.

Too many Boomers have expected to get immediate gratification. This means the average American debt is higher than in the past. The Federal Reserve reports that the combined debt of 65- to 74-year-olds is rising faster than any other age group. Their debt now averages $26,000. Many also still have a mortgage. Because of these reasons too many people are falling victims to these pension loans.

These loans are often called advances and you are told they are not a loan.

This is to try and skirt the law. If someone gives you money now and is willing to accept repayment plus interest to pay off the obligation, have they made you a loan? Of course they have. They will often want you to set up another checking account and move some of your pension money into it so that they can try to get around another law. These and other moves should set off red lights that something is wrong.

Believe it or not, it gets worse.

While they try not to disclose the interest rates, they range from 27 to 106 percent. This scam is not regulated by the government. With no supervision, fraud is rampant. They tell you to borrow for things such as a boat or vacation. You cannot commit money for these purposes that were supposed to provide for your life necessities in retirement.

These are very close to payday loans that Pennsylvania outlawed several years ago. They get you in an endless loop of debt that is very hard to escape.

People with good credit should never be afraid of using their high rating. If it says on the window, “No credit check required,” do not enter. You can be assured that interest rates will be much higher than other possible sources.

Gary Boatman is a certified financial planner and local businessman who serves as president of the Monessen Chamber of Commerce.