4 Steps To Take If You Are Forced Into Early Retirement

Move from the defensive to the offensive with your financial strategy

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Every year, there are many retirees who 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 chooses to retire early willingly. More than 40 percent retired early due to health issues or disability, compared to 26 percent because of downsizing or their company's closure and 14 percent in order to act as a caregiver for a spouse or family member.

No matter what circumstances lead you to retire earlier than planned, 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 the defensive to the offensive with your financial strategy.

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 health care, 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.