Early Retirement Scams

The thought of an early retirement is an alluring dream to many. Unfortunately, most people are not in a financial position to do so. Even more unfortunately, some financial “experts” tout early retirement schemes by misrepresenting and omitting to disclose the downside risks involved. Despite claims to the contrary, early retirement strategies are fraught with risk, and the results have been disastrous for many employees.

These scams often occur at corporations that are having large reductions in force and/or are offering early retirement packages to workers. On many occasions, the affected employees are given the option of remaining in a company pension plan or receiving a lump sum payment.

Brokers have a conflicting interest in making sales and earning fees and commissions regardless of the unsuitability of the proposed strategy. Brokers often perpetrate their early retirement scams at “free lunch or dinner” retirement seminars at or near the place of employment. Sometimes, the apparent backing of an employer greatly aids them in gaining the confidence of their audience.

During the seminar, the broker usually pitches a strategy that purports to demonstrate how employees can retire earlier than they expected by cashing out their 401(k) plan or taking a lump sum payment of the cash value of their pension, and investing the proceeds in a variety of investments, often in an IRA at the broker’s firm.

Employees may be told that everyone can retire early, that they can make as much in retirement as they can by continuing to work, that they can count on their returns being in a certain range, and that they can withdraw 7% or more and never run out of money. Statements like those should be considered to be red flags of fraud.

Brokers may tout a “little known” IRS rule called Section 72(t), which allows investors in a tax-deferred account to avoid the 10% penalty that generally applies to distributions made before age 59 ½. In order to avoid the penalty, the distribution must be “part of a series of substantially equal periodic payments.” The unintended consequence is often that the withdrawals need to be stopped or reduced because of negative market conditions, but they cannot be stopped without subjecting all of the distributions to the 10% penalty.

Brokers often represent that these investments will produce high annual returns. Little if any mention is made of risks and the erosion of returns that occurs from fees and expenses. Instead, the broker recommends annual withdrawals starting as high as 7 to 9 percent. Materials provided in later one-on-one meetings represent that these rates are sustainable for 30 years. The problem is that they assume unrealistic annual returns (e.g., 11 to 14 percent).

Such returns are unrealistic and unsustainable. The stock market is very risky. The average annual return of U.S. stocks is 9.6%, and less risky bonds have returned less than 6 percent on average. As we know, the prices of stocks and bonds fluctuate and the volatility of today’s stock market is extreme. There have been many short-term periods during which the stock market returned far less than 9.6% or generated losses, sometimes huge losses.

In summary, employees and employers should be very wary of early retirement sales pitches. Employers run a risk of incurring legal liability for their role in facilitating early retirement scams that cause financial harm to their employees. Evaluation of an early retirement strategy poses a number of complex issues and requires extensive analyses that most individuals are not in a position to carry out. No one should commit money to an early retirement proposal without first, at a minimum, verifying through a state securities regulator that the promoter has the proper licenses and is registered to sell securities or investment products in the state, and that the investments themselves are registered. In addition, it would be wise to submit the plan or offering materials to an expert for an independent evaluation before investing.

If an investor believes that he or she has been the victim of an early retirement scam, the investor should consult counsel immediately.

If you have found yourself a victim of an early retirement scams, call the lawyers of Page Perry for experienced representation at (770) 673-0047 or (877) 673-0047.