How to Enjoy a Scam-Free Retirement

What to watch out for, what to consider, and where to go for guidance to make your nest egg go the distance

Let's face it—there are a lot of scam artists out there itching to get their grubby hands on your hard-earned nest egg. Don't fall prey to those "free lunch" seminars or "retire early" frauds. Here are some common schemes to avoid and Web sites that can help you stay out of trouble.

Tips to Avoid Being Taken

1. Be skeptical of "free lunch" seminars. Even if they take place at or near the workplace, don't assume that your employer is backing the event.

2. Be wary of early-retirement pitches based on "little-known loopholes." While IRS Section 72(t) is a little-known loophole that allows you to access your retirement funds early, there's a lot more to a successful early retirement than avoiding a 10% tax penalty.

3. Determine your willingness to live with an unpredictable amount of retirement funds. Think hard before trading the relative certainty of a company pension—which may offer steady and predictable payments for as long as you live—for the uncertainty of investments whose value fluctuates.

4. Know your plan. Many employers allow former employees to leave their 401(k) assets in the company's plan. Before moving your assets, take the time to understand your current plan. You may find that staying put is a sound and less costly option.

5. Understand the tax bite. Before quitting and cashing in a 401(k), do a little math. Remember that even if you avoid the 10% early-withdrawal tax penalty, you won't be able to spend every penny. Instead, you will have to pay ordinary income taxes on your withdrawals. Be sure to ask a tax professional about any other potential tax consequences of your decision.

6. Figure out the unintended consequences of early retirement. You may also wish to consult an attorney about any other unintended consequences, especially if you are in debt or owe child support or alimony. Depending on the laws in your state, cashing out of your retirement plan may mean your creditors can collect against that payment—even if you're rolling the assets into a traditional IRA.

7. Understand the difference between classes of mutual fund shares. Keep in mind that Class A mutual fund shares may be the best choice if the investment amount is large enough to qualify for a discount on front-end sales loads that may be offered for larger mutual fund investments and usually starts at $50,000, but sometimes they can be as low as $25,000. Use FINRA's (Financial Industry Regulatory Authority) Mutual Fund Expense Analyzer to compare and calculate mutual fund expenses.

8. Consider the costs associated with variable annuities. Be aware that most variable annuities have sales charges, including asset-based sales charges or surrender charges. In addition, variable annuities may impose a variety of fees and expenses when you invest in them, including mortality and expense fees, administrative costs, and investment-advisory fees.

9. Check the speaker's credentials. Find out whether the person offering you investments is registered with FINRA, which regulates brokers. Use FINRA 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 research an investment adviser, contact your state securities regulator or call (202) 737-0900.

10. Get a second opinion. Consult with a financial professional of your choosing before taking the advice of someone who "found you."

Data: Financial Industry Regulatory Authority

Common Retirement Scam Pitches

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 it's 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 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% or more!

First of all, no one can predict what an investment will do from one year to the next—and even if an investment performed well in the past, it's no guarantee it will do so in the future. Second, any return over 10.4% exceeds the historical long-term returns for the stock market (assuming all dividends are reinvested rather than spent) 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%. Finally, the stock market is inherently volatile—it goes up, and it goes down. Over the past 80 years, there have been many short-term periods that produced returns well below the historical average of 10.4%.

You can withdraw 7% or more and never run out of money!

While there is no perfect consensus on what this withdrawal rate should be, the uncertainty of returns, 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 of 3% to 5% per year, especially in the first years of retirement.

Data: Financial Industry Regulatory Authority

Helpful Web sites

Here are six useful sites that are sponsored by the SEC and FINRA. They offer broker searches for past transgressions, information on cash-outs, reviews of seminar materials, and investing tips and explanations of financial-adviser designations.

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