(Information in this article is provided mainly by the Colorado Federal Executive Board (FEB), which represents over 250 federal agencies, 53,000 federal employees, and 40,000 military personnel throughout Colorado. The Colorado FEB, one of 28 such boards nationwide, has among its stated goals being a “catalyst for communication” that benefits citizens. The Board cooperated with the federal Office of Personnel Management, the Securities and Exchange Commission, and FINRA [a brokerage monitoring entity] in developing this article’s information.)
Retirement can be an alluring stage of life, a time when, as a psychologist once put it, you can stop doing the things you have to do and start doing the things you want to do. But living that ideal life 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 self-described financial “experts” tout early retirement schemes that promise more than they can deliver. They mislead with flawed or even fraudulent retirement projections and pitches—particularly those that dangle the prospect of early retirement with little reduction in income compared to your working years.
In one real-life example, employees of a major corporation attended free seminars where a broker recommended a strategy in which they could a) retire earlier than they might otherwise have done; b) cash out of their 401(k) plan or take a lump-sum payment for the cash value of their pension; and c) open a traditional Individual Retirement Account at the broker’s firm and invest in securities (that happened to carry substantial risk and high fees.)
During the seminars, the broker represented that these investments would generate aggressive annual returns as high as 18 percent. He made little mention of any risks associated with such aggressive growth, or that the value of the investments would fluctuate with changing market conditions. The pitch also failed to explain that the overall return on the investments would be reduced by various fees and expenses associated with the investments.
Common red flags to watch for in Early Retirement Scams
The above scenario illustrates just one red flag to watch for when it comes to early retirement schemes. Others include pitches such as:
Everyone can retire early! The reality is that many employees simply do not have the resources to do so. Early retirement is not feasible for many people and is particularly risky for workers who haven’t saved enough for retirement and who have limited opportunities for other employment.
You can make as much in retirement as you can by continuing to work! Promises like this usually hinge on unrealistically high returns on investments and unsustainably large yearly withdrawals.
You can expect returns of 12 percent or more! Of course, no one can predict what an investment will do from one year to the next. Plus, any return over 9.6 percent exceeds the historical long-term returns for the stock market and greatly exceeds long-term returns for less risky investments such as bonds, for which the average annual return over the long term is less than 6 percent. And do not overlook the fact that over the past 80 years, there have been many short-term periods that produced stock market returns well below the historical average of 9.6 percent. To say nothing of short-term periods that brought investment losses. A variation of this pitch is known as the “Phantom Riches” tactic — dangling the prospect of quick, sure wealth. E.g., “These gas wells are guaranteed to produce $6,800 a month in income.”
You can withdraw 7 percent or more each year and never run out of money! While there is no universal consensus on what an annual withdrawal rate should be, the uncertainty of return, market fluctuations and increased life expectancies among other factors argue for being conservative with your withdrawals, especially during the first years of retirement. Many experts recommend withdrawal rates between 3 and 5 percent per year, especially in the first years of retirement.
In addition to watching out for such come-ons, be sure you know the unintended consequences of choosing early retirement. Most people know about penalties and tax implications of early withdrawals from IRAs. But not as many realize that cashing out your retirement plan might mean your creditors can collect against you in ways they otherwise could not. You would be wise to consult an attorney about any other unintended consequences.
Know the psychology of the scam
The common thread running through most investment fraud is the psychology behind the pitch. When does something that sounds “good” become something that sounds “too good to be true”? It can be a hazy line to draw. Fraudsters are masters of persuasion psychology, tailoring their pitches to match the psychological profiles of their targets. Opportunistic scammers look for an Achilles heel by asking seemingly benign questions—about your health, family, political views, hobbies, etc. This can tell them which buttons to push. Even savvy people can be won over and assume the fraudster’s good will despite the details of the proposed investment strategy remaining hazy.
Another psychology factor, quite naturally, is simply the allure of a leisurely early retirement. Those who promote it can be very persuasive in feeding that allure. You need to adhere to rational, critical thinking before you act. Signing on to an early retirement investment strategy presents risks. It makes sense only if you are sure 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. In one scheme that touted the ability to withdraw 7.5 percent to 9 percent of retirement investments annually, the math on that assumed growth of 11 to 14 percent on the invested funds for as long as 30 years. Such rates are not realistic. Anyone who followed such a plan would threaten their retirement security. Many in fact found that out the hard way.
The more subtle psychology ploys in Early Retirement Scams
There are also scamming tactics that utilize psychology more indirectly—that is, not just making inflated money promises. Examples of these tactics include:
The “Source Credibility” Tactic — trying to build credibility by claiming to be a reputable expert. “Believe me, as a senior vice president of XYZ Firm, I would never sell an investment that doesn’t produce.”
The “Social Consensus” Tactic — leading you to believe that other savvy investors have already invested. “This is how (famously wealthy mogul) got his start. Yes, it’s a lot of money, but I’m in, and so is my mom and half her church.”
The “Reciprocity” Tactic — offering to do a small favor for you in return for a big favor. “I’ll give you a break on my commission if you buy now. Half off!”
The “Scarcity” Tactic — creating a false sense of urgency by claiming limited supply. “There are only two units left, so I’d sign today if I were you.”
Other tactics to be wary of in Early Retirement Scams in Colorado
Whether it’s a come-on for early retirement or planning your retirement financing in general, stay alert to these additional factors that can negatively affect your best laid plans for a secure retirement:
Unregistered products. Don’t be taken in by unlicensed individuals selling unregistered securities. These can include stocks, bonds, notes, hedge funds, oil or gas deals, or fictitious instruments. One give-away might be that no documentation (e.g., a prospectus) accompanies the security.
Complex strategies. Avoid anyone who pushes a highly complex investing technique that promises unusual success in confusing terms. Legitimate professionals should be able to make sure you fully understand any investment you’re considering — what it is, what the risks are and how the investment makes money.
High-pressure salesperson. No reputable investment professional should push you to make an immediate decision about an investment, or tell you that you’ve got to “act now.”
“Little known loopholes.” Be wary of early retirement pitches based on supposed little-known loopholes. These can be fabricated “secrets” that do not exist and that may even bring on additional troubles if you try to use them.
Account discrepancies. If there’s any chance your financial advisor or account custodian is not someone you trust absolutely, any unauthorized trades, missing funds or other problems with your account could indicate fraud. Make sure account activity is consistent with your instructions.
“Free lunch” seminars. Some are legitimate ways for financial advisors to provide valid information and recruit new clients. But others are simply a tactic scammers use to hook their next victims.
If any of these tactics look familiar, it’s partly because legitimate marketers use versions of them too. They work subliminally. The trick is to understand them before encountering them, and then be able to differentiate the scammers from the legitimate players so you can be ready to resist the fraudsters.
You can take action against scammers . . . or preventively avoid them here in Colorado
If you feel justified in reporting an early retirement pitch that smells like a scam, consider filing a complaint with FINRA (www.finra.org/complaint) or the Securities and Exchange Commission (www.sec.gov/complaint/select.shtml). As a preventive measure when being presented with a retirement financing strategy, you can also check the credentials of whoever is making the presentation. Find out whether the person is registered with FINRA, which regulates brokers, by using FINRA BrokerCheck at www.finra.org/brokercheck or call the FINRA Hotline at (800) 289-9999. If he or she is registered, be sure to check out any red flags raised by employment or disciplinary history. To check out an investment advisor, use the Securities and Exchange Commission’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov or contact your state securities regulator at www.nasaa.org (in Colorado visit https://securities.colorado.gov/).
Consider getting a second opinion. Before committing to an early retirement strategy, consult with a financial professional of your choosing before taking the advice of someone who “found you.” 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.
How much do you actually need for a secure retirement?
Simple logic dictates that before you think about early retirement or look at strategies for achieving it, you first need a realistic assessment of how much you actually need to finance your retirement. The answer to this crucial question depends on many factors, including your other sources of income, the rate of return on your investments, and how long you will live (the latter two being impossible to know for certain). For most people, a retirement savings nest egg will need to be many times their current yearly earnings. The Employee Benefit Research Institute (EBRI) suggests you will need as much as 12 times your current household earnings, and in some cases more, to obtain a 90 percent chance of having adequate retirement income to cover basic expenses plus non-covered health care costs throughout retirement, which vary widely based on many factors but can total hundreds of thousands of dollars in some cases. A variety of online calculators are available to help you with these projections. Just search the terms “Retirement Calculator” and/or “Retirement Healthcare Costs.”
(End note: The Colorado Federal Executive Board (FEB) has been offering retirement training classes for more than 20 years, geared primarily to an audience of federal employees. The FEB’s emphasis is on retirement programs and planning specifically for such employees—such as TSP, FERS Supplement, coordinating federal health benefits with Medicare, Federal Employees Group Life Insurance, and Federal Long-term Care Insurance. Some generic training topics are useful for more general audiences as well. Learn more at https://colorado.feb.gov/.)