The scheme is hatched with an invitation to employees of a major corporation to attend a free seminar where a broker pitches a strategy that recommends one or more of the following actions: 1) retiring earlier than one might otherwise have done; 2) opt out of the company's retirement plan, which requires the employee to take a lump-sum payment for the cash value of his or her pension; 3) open a traditional Individual Retirement Account at the broker's firm; and 4) invest in variable annuities, Class B and C mutual fund shares, and exchange traded fund shares, which were substantially more risky than the fixed benefit pension given up. The suggested investments are represented as being able to generate returns as high as 18 percent, but little mention is made about the risks associated with such aggressive growth. The pitch also fails to mention the fees and expenses associated with the transactions. Furthermore, the strategy recommends annual withdrawals starting between 7.5 percent and 9 percent of the customer's initial investment, with increases at five year-intervals. While materials given to customers portrayed these rates as being sustainable for 30 years, they assume returns of 11 to 14 percent. These rates are simply unrealistic and not achievable without taking a substantial amount of risk.
Since slick early retirement promoters can be quite persuasive, investors cannot be urged enough to think before they act. Taking early retirement presents risks and only makes sense if one has saved enough to begin with, made intelligent investment decisions during retirement years, and can withdraw money at a rate that does not deplete savings too early. Though there is no perfect formula on what the withdrawal rate should be, the uncertainty of return, market fluctuations, and increased life expectancy argue for being conservative with withdrawals, especially during the first years of retirement.
Investors feeling lured in by promises of easy money during retirement should consider the following tips before withdrawing funds and committing to a broker:
-Be skeptical of free lunch training sessions and other seminars that promote early retirement strategies, even if those events take place at the workplace.
-Be wary of early retirement pitches that promote exceptions to the 10 percent tax penalty.
-Think hard before trading the relative certainty of company pension, which may offer steady and predictable income for life for uncertain and fluctuating investments such as variable annuities and mutual funds.
-Leaving 401(k) assets in the company's plan is probably the safest and least costly option. Numerous online resources about 401(k) investing can be found online and can help investors make good decisions.
-Before cashing in a 401(k), it is important to do some math. Even if one can avoid the 10 percent penalty, not all the money withdrawn from the 401(k) can be reinvested outside of an IRA or other retirement account. Ordinary income taxes on withdrawals must be paid. So it is important to consult with a tax professional about any potential tax on the amount withdrawn before you reinvest in the early retirement program.
-Consulting with an attorney is important if one owes child support or alimony. Cashing out of a retirement plan may mean that creditors can collect against any payments received.
-If the strategy involves mutual fund investing, Class A mutual funds may be the best option if the investment amount is large enough to qualify of a discount on front end sales loads.
-If the strategy involves variable annuities, be aware that most variable annuities have sales charges, a variety of fees, administrative costs, and investment advisory fees.
-Verify whether the person offering early retirement investments is registered with FINRA by using FINRA BrokerCheck. If the person is registered, it is important to check for any disciplinary history.
-Always seek a second opinion before committing to an early retirement program. Set up an appointment with a financial professional before considering someone who is looking for clients.
Have you suffered losses resulting from an early retirement investment program that failed to deliver what was promised? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at firstname.lastname@example.org for answers to any of your questions about this blog post and/or any related matter.