4 Steps To Take If You Are Forced Into Early Retirement
Move From The Defensive To The Offensive With Your Financial Strategy
Every year, there are many retirees that are forced into an early retirement. In fact, according to the Employee Benefit Research Institute, almost half of retirees enter retirement earlier than they planned. Of those early retirees, only a quarter of them choose to retire early willingly. Forty-one percent retired early due to health issues or disability; 26 percent were forced into early retirement because of downsizing or their company's closure; and 14 percent retired early to act as a caregiver for a spouse or family member.
No matter what circumstances lead you to retire earlier than planned, one thing remains true: you may need to rethink your financial plan for both the short- and long-term. Your original plans may have to be totally reworked, and you may find that things you had accounted for are no longer needed. Regardless, there are steps you can take to move from defensive to offensive with your financial strategy.
What To Do If You Are Forced Into An Early Retirement
1. Review your benefits. While you probably didn’t anticipate needing them yet, you'll need to consider when and how to begin tapping any benefits that are available to you. That includes things like Social Security, options for healthcare, and your spouse’s benefits. If you're not able to claim Social Security yet because you haven't reached age 62 and you're waiting until age 65 to be eligible for Medicare, you may need to look into alternative options for health care.
2. Review your investments. You’ll need to make some decisions about your 401(k), IRA accounts, and other investments. It may be best to postpone withdrawing any money from these sources to preserve your retirement savings. Otherwise, you’ll need to start curbing your expenses to match your income from your investments. If some investments aren’t giving you the returns you expected, like a real estate investment, it may be best to sell it and save the money. Remember, however, that selling investments can trigger capital gains tax if you're selling at a profit.
Also, think about the order in which you withdraw from your investment accounts. From a tax perspective, it typically makes more sense to withdraw from taxable accounts first to allow your 401(k) or IRA to continue growing tax-deferred.
3. Consider your pension payments. If you have a pension, you need to consider whether to take it as a lump sum or receive it in monthly installments. Both of these options could work well, but it depends on your situation. If you are an experienced investor or working with a financial advisor, you might find that a lump sum is beneficial so you can build on it with the right assets. If you want to rely on it as part of your monthly income, taking it in installments may be best. Keep in mind that if your pension was funded even partially by you using after-tax dollars, your pension payments are partially taxable.
This is important to keep in perspective as you manage withdrawals from taxable or tax-advantaged accounts to minimize your tax liability.
4. Estimate how long your money will last. Don’t blindly enter early retirement. Look at your income and estimate how long that money will last based on your expenses and budget. You’ll see where you need to make adjustments and how they’ll affect your lifestyle.
Focus on the larger expenses first, such as housing and health care. Then, zero in on the other expenses in your budget, such as transportation, food, entertainment, personal care and travel. Compare the total monthly cost of running your household to the amount you may be drawing from Social Security and from your taxable and tax-deferred retirement accounts. Then, factor in your anticipated life expectancy to get an idea of how long your money is likely to last, based on your estimated withdrawal rate.
If you risk coming up short, you may need to review your spending or consider how you can generate additional cash flow, either through full-or part-time work or by investing in an income-producing product like an annuity.
If you have additional questions on this topic and other issues related to early retirement, please download this e-book, Unforeseen Circumstances in Retirement. If you have questions specific to your set of circumstances, the best next step you can take is to seek the advice of a qualified professional.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make.
Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.