With a growing number of retirees, older workers, and survivors, fragile older people are more susceptible to financial exploitation.
Wealth Advisor’s recent article, “Elder Financial Abuse Will Get Worse As Americans Age,” reports that, while there are thieves and legal exploiters, the root of elder financial abuse is in our retirement system.
For 40 years, the system has required people to save and handle very large sums of money to last their lifetime. In 2017, $14.5 trillion (85% of GDP) is in self-directed retirement accounts, which are prime targets for financial predation. In sum, our 401(k) and IRA system invites financial abuse.
We can caution people but, giving financial protection advice to older Americans with lump sums is not an easy thing to do. Many of the elderly are physically and mental impaired, socially isolated and have plenty of money.
Requiring professionals who handle IRAs to be fiduciaries, would have helped to prevent legal financial abuse. However, that regulation was recently overturned. As a result, professionals handling IRAs—the quickest-growing type of retirement account—are held to a lower professional standard. They cannot lie. However, they also can manage your account without putting your interests first, because they’re not required to be fiduciaries.
A study by the Justice Department found that one in 20 older adults said they were financially mistreated in the recent past. In one year, the prevalence for emotional abuse among elders was 4.6%; 1.6% for physical abuse, 0.6% for sexual abuse, 5.1% for potential neglect and a 5.2% for current financial abuse. Experts say that this is an undercount, because it only considers abuse by family members.
The GAO also found elder abuse to be a widespread and growing problem. With a rule of thumb that we should accumulate 8-10 times our final salary in retirement individual-directed accounts (and no realistic option to acquire a fair and efficient lifetime annuity), elder financial abuse is far more prevalent in America than elsewhere.
Financial advisers will certainly become a source of financial abuse, a thought that concerns the industry. However, many legal practices, like selling inappropriate products, can occur when the adviser is not a fiduciary. Exploitation by financial institution employees may increase, as more and more elderly have cash nest eggs.
Reference: Wealth Advisor (September 11, 2018) “Elder Financial Abuse Will Get Worse As Americans Age”