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Stock Broker Fraud Articles

Considering Early Retirement?
Be Careful, the Grass is not Always Greener.
By Richard A. Lewins

As many companies are downsizing, or looking to replace older (read: higher compensated) employees with a younger (read: cheaper) workforce, many workers in their early to mid - fifties are being given the option to take early retirement. A great many of these individuals have the same profile:

1. They have accumulated significant retirement assets, including company stock, 401k contributions and other retirement plan savings.
2. They have had little or no input in determining how those assets have been invested.
3. They have had little or no investment experience, especially when it comes to managing such a large sum of money as their retirement savings.
4. They will be relying on these assets to meet their financial needs in retirement.
5. They need professional advice.

What happens in many cases is that they are approached by, or recommended to, a stockbroker/financial advisor who claims to be able to offer a plan that will meet the income needs of the retiree and still allow for growth of the underlying assets. What the "advisor" / "broker" shows the retiree in support of this proposition is charts, graphs and the like that reflect the average, long term growth associated with investment in the stock market or various indices meant to reflect the market as a whole. The average annual growth rate evidenced is usually somewhere between 10% - 12%.

The first problem is it is just that, an average. It does not mean that the market returns 10% to 12% each and every year, only that over the long term, ten years or twenty years, it will average those returns. And even if the market did return 10% to 12% each year, it would not do it on a steady, month in month out annualized 10% to 12 % basis; however, the retiree is now dependent on a steady, month in month out income, much like the paycheck he was receiving while employed.

The second problem is the broker or advisor is attempting to use capital gains or total returns as a substitute for income. Again, these retirees need steady, month in month out income. Common stocks by their very nature are not that predictable. There are instruments that provide the type of predictable income needed by retirees, such as CD's, bonds, bond funds, preferred stocks and Unit Investment Trusts (UIT's) that are comprised of fixed income instruments; however, they do not typically provide the upside potential associated with common stocks or stock mutual funds.

The question then becomes, can the retiree accept the risks associated with the potential returns afforded by the stock market, or is it more important to have a steady, predictable stream of income? In most cases the answer is the latter, but the retiree is not presented with the option of a lower but more predictable income stream; he is only shown the average market return data leaving him with a false sense of security regarding his decision to accept early retirement.

To compound the mistake of substituting market returns for income, many brokers and advisors set up the monthly withdrawals under a 72(t) plan. This allows for systematic withdrawals from a retirement account before the age of 59 ½ that will not be subject to early withdrawal penalties from the IRS; however, the payments are set by a formula that cannot be changed for five years or until the retiree reaches age 59 ½, whichever is later, or the retiree will be subject to penalties and interest on all withdrawals taken to date. This means that even if the retiree discovers the faulty reasoning of the financial advisor, he is stuck with the plan until the later of five years or age 59 ½.

So, before making the final decision on whether or not to take early retirement ask yourself and your financial advisor the following questions:

1. How much money, as an annual percentage return, do I need my portfolio to generate each month/year? For example, if I have $500,000.00 in assets and I need $3,000.00 /month before taxes, then I need my portfolio to generate 7.2% after any fees or expenses.
2. If there are no fixed income investments that will generate the income I need, would I rather lower my needs to a level equal to what fixed income investments can generate or am I willing to put some or all of my assets at risk in order to make higher returns?
3. Am I better off working a few more years in order to generate additional retirement assets?
4. Are health insurance and life insurance issues I need to take into consideration?
5. What, if any, options for lifetime income are offered by my employer?

Remember, once you make the decision to retire it is hard to re-enter the workforce at a comparable level should you find that your assets are insufficient to meet your needs. Be realistic in your needs and expectations, and you should be able to enjoy your golden years.

Richard A. Lewins is a securities lawyer with Burg Simpson Eldredge Hersh & Jardine in Dallas, Texas. He has represented hundreds of investors throughout the country in securities arbitrations. He has been a featured speaker and author in the area of securities and securities litigation, and his opinion on securities related topics is frequently sought by news organizations. He was recently selected as a Texas Super Lawyer, a designation available to only the Top 5% of lawyers in the state.