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Why you need to protect your family from retirement scams on TikTok
67% of teens say they ever use TikTok, with 16% of all teens saying they use it almost constantly. That is according to the Pew Research Center. It's a reality in the modern world that we must face head-on. Even if we don't permit our children to have or use TikTok, it's hard to know for certain whether they are.
Surveys repeatedly find that 2 in 5 couples lie to their spouse/partner about money. Shame and guilt top the reasons why which are the emotions you can expect if you are the victim of a scam. In other words, being proactive is better than waiting until something terrible happens.
Examples of retirement scam artists on social media
We've always had to deal with scam artists. Thirty years ago they were selling fake watches on the streets, and today they're selling cash value life insurance policies on TikTok.
The first rule of spotting a scam artist on social media is when the graphics and one liners are interchangeable with used car sales commercials from the past. Watch at least some of the first commercial and then watch the TikTok.
Did you see the comments on his TikTok post? Sadly, you can see people falling for the scam.
When I first started to watch the TikTok, I didn't think it could get worse than the B movie music blasting in the background, until he claimed that the "average return of the 401k over the last 20 years is 4.25% and the average return of the 501k is 9.9%."
As tempted as I am to write about all of his nonsense, I'll share just a few points.
A 401k is not an investment. As specified by the IRS, "A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts." Employees purchase investments within a 401k. The returns on those investments depend on the investment choices.
Let's make it simple and assume a 401k was invested in the S&P 500 over the past 20 years. The return would have been roughly 10%, minus 401k fees.
According to the Department of Labor, the Aggregate rate of return of all 401(k) plans over the past 20 years was clearly higher than 4.25%.
If you thought that was bad, well, it gets worse. According to this person on TikTok who has 247,000 followers, "Uncle Sam will take half of your money when you withdraw it from your 401k."
As you guessed, this is hogwash. Withdrawals at retirement age are taxed at ordinary income tax rates. I'll share some insane assumptions to point out the lunacy spewed by this TikToker.
According to Vanguard, the average retirement savings for someone 65+ is $209,984.
Let's assume you withdraw all of it at once and take zero deductions. That would never happen, but the effective federal income tax rate would be 20% even under these circumstances. Feel free to see for yourself.
If what you're reading thus far seems out of character for my writing, well, it is. I'm mad. Everyday folks shouldn't have to worry about missing out on their retirement dreams because there's a loophole in regulatory law.
I can only imagine a spouse doing this, and what it could do to a marriage. I'm not going to be shy about folks who are selling these products by telling bold faced lies.
I've enjoyed following along with Dr. Bontrager on Twitter, which is where I found these TikToks. He is an Assistant Professor of Management and prior Account Executive for 12 years in the health insurance industry.
Downsides to annuities being pushed on social media
There are various types of annuities that are riddled with fees. Here are some more of the downsides to annuities:
High premiums
Whole life insurance policies typically have higher premiums than term life insurance policies, making them more expensive for the same level of coverage. The higher premiums are needed to cover both the insurance cost and the policy's investment component.
Limited investment options
The investment component of a whole life insurance policy is typically limited to the insurance company's investment portfolio, which may not offer the same level of diversification and potential returns as other investment options, such as mutual funds or exchange-traded funds (ETFs).
Lower returns
The cash value accumulation in a whole life insurance policy is generally lower than what you could earn through other investments due to the high fees and expenses associated with the policy.
Complicated policies
Whole life insurance policies can be complex and difficult to understand, with many different components and options. This can make it challenging to know exactly what you are paying for and what benefits you receive.
Limited liquidity
The cash value of a whole life insurance policy can generally only be accessed through policy loans or withdrawals, which may come with fees and interest charges. This can limit the liquidity of the investment and make it difficult to access your funds when needed.
I decided to dive deeper to explore the fees by researching "How I can make high commissions selling annuities." I took one for the team and undoubtedly will receive an onslaught of spam to receive this actual annuity sales script.
The most popular annuity compensation option is paid once upfront in a lump sum payment after issuing the policy. Here's an example of a sales commission illustrated on an annuities sales site:
5 ways to protect your family from TikTok scammers
Hire a professional: Consider hiring a fee-based Certified Financial Planner who is legally bound to put your interests ahead of your own. A third person who is a professional will prevent impulsive investing decisions.
Use the FPA PlannerSearch®: Interactive tool to find a certified financial planner who is a member of the Financial Planning Association.
Ask tough questions: These ten questions provided by the CFP organization can help you know what you will be charged when meeting with a financial planner and choosing an investment.
Keep it simple: A good rule of thumb to share with your family is that if it sounds too good to be true, it probably is.
Communicate and provide examples: If you have children or a spouse on TikTok, speak openly to them about these scams and provide them with examples.
Partner with your spouse: Set a rule that the other spouse must play the Devil's Advocate before spending much time considering an investment. In other words, be the skeptic tasked with finding everything wrong with what the other partner believes is right. Regular and open conversations about money with your spouse are always good.
We hosted Skip Schweiss on the Modern Husbands Podcast for a discussion about investing as a couple and rules put into place to reduce being scammed while saving for retirement.
Skip Schweiss, CFP®, AIF® currently serves as the volunteer past president for the Financial Planning Association® (FPA®), the leading membership organization for Certified Financial Planners.
In 2020, Schweiss concluded a 12-year career with TD Ameritrade, where he most recently served as President of TD Ameritrade Trust Company and Managing Director of Advisory Advocacy. Mr. Schweiss directly influenced legislation and regulation, including the SECURE Act (2019) and the DOL Conflict of Interest Rule, among others.
Bonus explanation of scams
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