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

by Mara Der Hovanesian

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.