Can you afford early retirement?  Should you listen to others to make this determination?  These are issues that many of the “baby boomers” constantly deal with.  What are some of the things that you should look for to protect yourself?

Be Skeptical of Early Retirement Investment Claims:

Because the allure of a leisurely retirement can be very tempting, and those who promote early retirement schemes can be extremely persuasive, it’s critical to think carefully before you act.  Signing on to an early retirement investment strategy presents risks. It only makes sense if you have saved enough to begin with, make smart investment choices during your retirement years and withdraw money at a rate that does not deplete your savings too early.

How much is enough? This depends on many factors, including other sources of income, such as your Federal retirement benefit, rate of return on your investments and how long you live. You likely will need a savings nest egg that is many times your current yearly earnings to provide enough income to live comfortably in retirement. For an approximate estimate of how much savings you will need to accumulate, use the Federal Ballpark Estimate at www.opm.gov/benefits calculator.

Be skeptical if you hear that:

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 is 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 percent 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, this is no guarantee it will do so in the future. Second, any return over 9.6 percent exceeds the historical long-term returns for the stock market (assuming all dividends were 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 percent. 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 9.6 percent.

You can withdraw 7 percent or more and never run!  While there is no perfect consensus on what this withdrawal rate should be, the uncertainty of return, 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 between 3-5 percent per year, especially in the first years of retirement.

Please keep in mind that some early retirement and investment pitches are outright scams. The common thread that binds investment fraud is the psychology behind the pitch.  We’ve all heard the timeless admonition “If it sounds too good to be true, it probably is”-which is great advice, but the trick is figuring out when “good” becomes “too good.” There’s no bright line. Investment fraudsters make their living by making sure the deals they tout appear both good and true. Fraudsters are masters of persuasion, tailoring their pitches to match the psychological profiles of their targets. They look for an Achilles heel by asking seemingly benign questions-about your health, family, political views, hobbies or prior employers. Once they know which buttons to push, they’ll bombard you with a flurry of influence tactics, which can leave even the savviest person in a haze.