One of our favorite movies is the 1939 classic, "You Can't Cheat an Honest Man."
Written by and starring W.C. Fields in one of his signature roles as a circus con-man, the story details how people's greed can get the better of their common sense.
While we would not impugn the honesty of the average retiree, we think there may be some similarities to a current problem in the financial marketplace – people using variable annuities to opt for early retirement on a basis that defies economic reality.
The National Association of Securities Dealers, on Sept. 14, 2006, released an NASD Investor Alert entitled "Look Before You Leave: Don't Be Misled By Early Retirement Investment Pitches That Promise Too Much."
This release describes certain instances of what are characterized as broker misconduct in pitching a strategy recommending that people take retirement earlier than they might otherwise, investing their accumulated retirement funds in risky investments. Among the risky investments listed were VAs, mutual fund shares and exchange-traded funds.
Any sales program that uses misleading, inaccurate or fraudulent materials is deplorable. But the alert creates a bit of a quandary. Specifically, why are the consumers who undertook these programs exempt from responsibility for obtaining a realistic understanding of their retirement options and particularly for subscribing to a scheme that defies economic reality?
The NASD release does not give much in the way of details about how much erroneous information these consumers received. But the release does state that the retirees subscribed to strategies that had annual withdrawals of 7.5% to 9% of the customer's initial investment with regular increases at periodic intervals, at rates projected to be sustained for retirement periods of more than 30 years!
Moreover, these schemes would require a consistent annual investment return of 11% to 14% – not an average return over the period, but a consistent annual return!
Even unsophisticated investors should have some idea of realistic potential investment returns – unless, like the dishonest man in the movie, they have let greed overcome common sense.
It is not sufficient to take the position that the people who lost money in these schemes relied on professionals to guide them. This is not to excuse the sales people who perpetuated this scheme. But one wonders how so many people could have suspended reality by taking what was said as absolute fact, rather than checking the proposals to see if they were realistic.
Except for rock stars or professional athletes, most people are eager to retire. Work, as the word connotes, is work. Most would opt for something other than work, if we had the choice.
