By Glenn Ruffenach
A valuable guide from Uncle Sam can help you avoid financial scams linked to early retirement.
The idea of retiring early still holds significant appeal for many workers – and scam artists know this. As such, you might find yourself receiving an invitation to an “early retirement seminar,” one that offers flawed or fraudulent investment pitches.
To help you spot trouble, the Securities and Exchange Commission, along with the Financial Industry Regulatory Authority, has published “Early Retirement Seminars 101: Smart Tips for Spotting Retirement Scams.” The guide explains how such ruses work, particularly those that “dangle the prospect of early retirement with little or no reduction in income compared to your working years.” The publication also offers real-life examples of fraudulent pitches and where to turn for help.
To start, the SEC recommends having a good idea – before signing up for any retirement seminar – of just how much money you might need for later life. (For instance, the Employee Benefit Research Institute in Washington notes that a good goal is a nest egg that totals about 12 times your current household earnings.)
Next, the guide cautions you to be skeptical if you hear, in an invitation or seminar, any of the following claims:
“Everyone can retire early.” Unfortunately, that’s just not so. As the SEC notes, early retirement is “particularly risky for workers who haven’t saved enough for an extended retirement and who have limited opportunities for other employment.”
“You can make as much money in retirement as you can by continuing to work.” The problem here: Such promises, according to the SEC, typically are tied to “unrealistically high returns on investments and unsustainably large yearly withdrawals.”
“You can expect returns of 12% or more.” No you can’t. No one can predict precisely what most investments will yield in the future. What’s more, the average annual return for stocks is 9.6% (assuming all dividends are reinvested) – and there are years, needless to say, when returns are well below that historical figure.
“You can withdraw 7% or more from your nest egg annually and never run out of money.” Most experts say annual withdrawal rates – especially in the early years of retirement – should be in the range of 3% to 5%.
In short, the SEC warns: “Don’t let the promise of easy money lure you into an early retirement you weren’t otherwise considering.”