Retirement accounts, such as IRAs, are a popular tax-deferred way to save and invest for retirement. As an individual nears retirement age, the prudent course of action is to shift the portfolio into more conservative investments. Most investors nearing retirement do not have enough time wait for their portfolio to recover from a steep decline in value. The prospect of working longer and delaying retirement is not always an option for those with limited job prospects.
When an IRA account is opened with a brokerage firm or investment advisor, the financial advisor is under a fiduciary duty to recommend investments that are suitable based on the investor’s age and financial situation. Investors have been ruined financially by financial advisors--sometimes through “free lunch” seminars--with promises of high returns and early retirement. Some of these schemes are not only flawed, but downright fraudulent. Older investors should be particularly wary of any investment strategy involving variable annuities.
Investors in their early 50s should be extremely cautious about investment schemes that promise early retirement by tapping into their IRA before they turn 59 ½. Individuals who withdraw money out of their IRA before they are 59 ½ years old are subject to a 10% early withdrawal penalty. However, Section 72(t) of the Internal Revenue Code allows individuals to take early withdrawals without penalty if the distributions "are part of a series of substantially equal periodic payments" that last for five years or until the individual reaches the age of 59 ½, whichever is longer. There have been numerous instances where investors were told that they could retire early and receive a steady lifetime income from their IRA without reducing their principal. These investors were unaware that the income promised was unrealistically high and that the investment strategies recommended were overly aggressive. Taking early retirement only makes sense when investors have ample savings, make prudent investments choices and use a withdrawal rate that does not rapidly deplete their principal.