Early Retirement Seminars 101: Smart Tips for Spotting Retirement Scams
For many Americans, retirement can be an alluring stage of life—a time when many hope to finally have the time to try new hobbies or travel. But retiring comfortably and being able to do the things you dream about requires a steady stream of income that lasts as long as you do. The earlier you retire, the more important it is to manage your retirement assets wisely.
Unfortunately, some financial “experts” tout early retirement schemes that promise more than they can deliver. This brochure will help you avoid being misled by flawed or even fraudulent retirement pitches, particularly those that dangle the prospect of early retirement with little or no reduction in income compared to your working years. It describes real-life examples of fraudulent early retirement pitches, provides tip on how to recognize and avoid these sorts of pitches and tells you where to turn for help.
What This Document Does Not Cover
Understand that this brochure does not cover early retirement packages that may be offered by your company. For employer-sponsored early retirement programs, the best source of information will be your company’s human resources or benefits department.
Employees of a major corporation attended free seminars near their place of employment where a broker pitched a strategy which recommended that they:
During the seminars, the broker represented that these investments would generate aggressive annual returns as high as 18 percent. Little mention was made of the risks associated with such an aggressive growth scenario. The most obvious risk being that the value of the investments go up and down with changes in market conditions. The pitch also failed to adequately explain that the overall return on the investments would be reduced by various fees and expenses associated with the purchase and ongoing administration of the investments.
Furthermore, the strategy recommended annual withdrawal amounts generally starting at 7.5 percent to 9 percent of the initial investment. While materials given to individual employees in one-on-one meetings portrayed these rates as being sustainable for more than 30 years, they assumed returns of 11 to 14 percent.
The reality is that these rates proved unrealistic and were not achievable. Employees who followed the broker's program could not maintain the recommended withdrawal amounts without depleting their retirement accounts to levels that threatened their retirement security. By the time many of the employees realized this, they had lost a significant portion of their retirement nest egg.
Be Skeptical of Early Retirement Investment Claims
Because the allure of a leisurely retirement can be very tempting, and those who promote early retirement schemes can be extremely persuasive, it's critical to think carefully before you act.
Signing on to an early retirement investment strategy presents risks. It only makes sense if you have saved enough to begin with, make smart investment choices during your retirement years and withdraw money at a rate that does not deplete your savings too early.
How much is enough? This depends on many factors, including other sources of income, such as a company pension, rate of return on your investments and how long you live. You likely will need a savings nest egg that is many times your current yearly earnings to provide enough income to live comfortably in retirement1. For an approximate estimate of how much savings you will need to accumulate, use the Employee Benefits Research Institute’s Ballpark E$timate calculator.
Be skeptical if you hear:
|What the IRS Says About Early Withdrawals from Your Retirement Plan|
In addition to the income tax you pay on most retirement plan withdrawals, Section 72(t) of the Internal Revenue Code imposes an additional tax of 10 percent on distributions from qualified retirement plans—including traditional IRAs—made before age 59 ½. The IRS does, however, allow you to avoid this 10 percent penalty if the distributions from your retirement plan "are part of a series of substantially equal periodic payments."
These payments must last for five years or until you reach age 59 ½, whichever is longer, and IRS rules govern how you calculate the amount of the payments. For more information on Section 72(t) and methods for calculating payments, see the IRS's FAQs regarding Revenue Ruling 2002-62.
Tips to Avoid Being Taken In
Don't let the promise of easy money lure you into an early retirement you weren't otherwise considering. Before you quit your day job (or night job) and invest your retirement savings, follow these tips:
Keep in mind that your retired life may be as long as, or longer than, your working life. Take the time to research your retirement options carefully—before you leave the working world behind.
If a Problem Occurs
If you have questions or wish to file a complaint about an early retirement pitch that involves investments, be sure to file a complaint with FINRA:
FINRA Complaint Center
Mail or Fax:
FINRA Complaints and Tips
9509 Key West Avenue
Rockville, MD 20850
Fax: (866) 397-3290
1 The Employee Benefit Research Institute (EBRI) suggests you will need target multiples of at least 12 times your current household earnings, and in some cases much more, to obtain a 90 percent chance of having adequate retirement income to cover basic expenses plus non-covered health care costs throughout retirement. EBRI Issue Brief, June 2006,“Measuring Retirement Income Adequacy: Calculating Realistic Income Replacement Rates.” Jack VanDerhei, Temple University and EBRI Fellow