Early retirement sounds good to everybody, especially to stockbrokers
and others hungry for baby boomers' retirement accounts.
early retirement schemes aimed at baby boomers
You cannot afford to retire now, no matter what your stockbroker or investment broker tells you. And chances are good, especially if you are a baby boomer, that your broker will press you to consider early retirement. Brokers jumping the gun in the race for baby boomer retirement accounts is an epidemic.
The securities industry has been anticipating this time in history since the baby boomer generation was first identified. More money will be flowing out of 401k plans and into IRA rollovers than at any other time in history. For stockbrokers and investment advisers, each account represents a potential income stream. The leading edge of the baby boomer generation turned 62 in 2008. The competition for the accounts is fierce and will only grow more heated.
Early retirement scams are just brokers attempting to jump the gun in this race for those lucrative income streams. People who are nearing retirement, who are eligible to retire under their company’s retirement rules, or who are being offered early retirement under a company buy out, are the primary targets. Brokers will make a pitch that the investor can afford to retire now and make as much from the earnings on their investments as they are currently making on the job.
Stockbrokers and investment firms are keen on selling the golden years
ahead of schedule, but the numbers don't add up for anyone but them.
Often brokers cite the historical return of the stock markt (11%) in convincing baby boomers to retire, leading them to believe that they can afford to withdraw 10% of their account each year while protecting every penny of their principal. As with any persuasive lie, there is an element of truth in that pitch. The market did return 11% in the period 1926 to 1999. But that statistic is relevant to you only if you plan to live another 73 years. Brokers seldom tell you that in the five year period between 1972 and 1977, the stock market averaged a 0.2% loss per year.
Let’s assume that through decades of saving you have accumulated a nest egg worth $1 million, and that you believe your broker and decide that you can afford to withdraw $100,000 every year. You expect your principal to remain at $1,000,000. Let’s also assume that for three years your portfolio makes money, but at only 5% per year, more than enough to cover inflation. If you withdraw $100,000 each of those three years, at the beginning of year number 4 your principal will be $842,375. To generate the $100,000 you need in year four, the account will have to return 12%.
Of course, now your broker is chasing not average returns but above-average returns. To do so, he must take more risk with your account. What if your account comes down on the wrong side of that risk? What happnens when your account has a down year and your principal sinks to $700,000? It will have to return more than 14% to generate your $100,000. What if it falls to $500,000? Now you need 20% per year to generate the $100,000.
Please understand, no matter how charismatic, no matter how persuasive, no matter his position in the local church, the securities salesman is thinking first of his own bank account, not yours. He may actually believe that he can deliver on the promises he makes. If it were up to him, he would make it happen for you. But it is not up to him, is it? Market performance will determine whether the broker’s predictions come to pass. If he is wrong, he’ll be fine. He has many customers and is making money from each of them.
The consequences for you are different. You don’t have many nest eggs. Only one. Investigate through an independent, unbiased source before entrusting that one nest egg with anyone.
