Investor Protection Guide: Advice to Take Early Retirement

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In this investment scheme, brokers may advise clients that they can retire early by cashing out their retirement accounts – such as a 401(k) or pension fund – and investing instead in a traditional Individual Retirement Account (IRA) with high returns. The danger of this type of aggressive investment is that it exposes retirement-aged individuals to a great deal of risk because of the possibility of substantial fluctuation in the value of their portfolios. Promises of high returns, making as much money during retirement as when working, or a never-ending stream of investment returns, are all red flags. Some of these early retirement plans are advertised to take advantage of IRS loopholes, such as IRC 72(t), for cashing out of retirement accounts early while avoiding penalties. While such loopholes do exist, there are remaining risks associated with early retirement. Accordingly, investors should remain skeptical and understand that these plans can expose them to unnecessary financial losses.

The Financial Industry Regulatory Authority (FINRA) provides the following 10 tips for avoiding an early retirement scheme:

  1. Be skeptical of “free lunch” seminars,
  2. Be wary of early retirement promises based on tax loopholes,
  3. Determine your willingness to live with an unpredictable amount of retirement funds,
  4. Know your current retirement plan, such as a 401(k),
  5. Understand the tax consequences of cashing out your current retirement plan,
  6. Determine what the unintended consequences of early retirement will be,
  7. Understand the difference between classes of mutual fund shares,
  8. Consider the costs associated with variable annuities,
  9. Investigate the credentials of the broker trying to persuade you to retire early, and
  10. Get a second opinion.

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