Forced Early Retirement
Despite the best-laid plans of many people approaching retirement age, nearly half of them will retire earlier than anticipated due to health issues, the need to care for a spouse or other family member, or the downsizing of their employer.
While some might receive an early retirement package from their employer, this isn’t a guarantee, and not even an option for those leaving the workforce due to their own health concerns or those of close family members. By asking the right questions and exploring all available investments, benefits, and resources, anyone facing early retirement should be able to successfully rethink their financial plan for the short- and long-term.
If you are facing the possibility of forced early retirement, here’s what you need to think about.
Health care benefits might be one of your top concerns if facing early retirement. If your spouse doesn’t have health insurance through their employer, you do have other options. If you lose your job, you can apply for new insurance through the Affordable Care Act and its website. With a lower income, you may now qualify for a subsidy or Medicaid. These options may be less expensive than the COBRA coverage offered by your employer. If you're waiting until 65 to qualify for Medicare, you may need to look at high-risk health insurance pools for health care. Those who are forced to retire early because of illness may be eligible for disability benefits. Also look for discounted coverage through any organizations you belong to, like the AARP.
If you’re laid off, you should consider collecting unemployment and any of the other benefits available to those without an income: food stamps, job training, and employment counseling. There is no drawback to collecting unemployment, and it may be all that you need to tide you over until other retirement savings, investments, or a pension begins.
If you’re no longer employed and aren’t yet collecting on Social Security, your investments will be your new primary source(s) of income. These can include real estate investments, a whole life insurance policy, annuities, and others. But before you start drawing on these, research the possible taxable events or fees for doing so. If you sell an investment like real estate at a profit, you’ll need to pay capital gains tax on it.
The order in which you draw on your investment accounts also matters. In general, from a tax perspective, it makes the most sense to withdraw funds from taxable accounts first to allow a 401(k) or IRA account you have to continue to grow, tax-deferred.
Those with pensions need to consider, with the advice from a trusted financial advisor, whether it’s best for them to take it as a lump sum or as monthly installments. Bear in mind that if the pension was funded in any part by your after-tax dollars, the pension payments will be partially taxable.
In general, this is important to keep in mind as you manage any withdrawals from any taxable or tax-advantaged accounts to minimize your overall tax liability.
How Long the Money Will Last
The three previous considerations will all feed into this overarching concern. Early retirement—whether voluntary or compulsory—means filling the gap between your income and expense needs today and when you expect your full retirement investments and plans to begin.
Once you’ve calculated your current expenses and any investment income, consider eliminating any shortfall by cutting back on expenses. This may mean asking any adult or college-age kids to carry their own financial weight, including paying rent for continuing to live at home.
Consider staying in the workforce. You might be able to set yourself up as a consultant in your field. Look for full- or part-time work that may pay considerably less than your last job but could still be crucial in keeping you afloat for the time being.
Keep Up Professional Networks
If there is any possibility you might one day return to work, be sure to keep up with your professional connections and network. You never know when someone might hear of the perfect job opportunity at another company.
Enjoy the Next Stage of Your Life!
Retirement may have come sooner than expected, but you can still enjoy this time by pursuing your interests and hobbies. With a more open schedule, you’ll be free to renew friendships that you may have let slide in recent years. Many retirees find great satisfaction and fulfilment in volunteering their time and talents at local nonprofits.
If you have more questions, seek advice from your financial advisor. These steps are broad guidelines and should be used as a resource to start asking the right questions, not as investment suggestions.