Sometimes, retirement gets foisted on us sooner than we expect — by our employer, our health status or other reasons.
Work May End Sooner Than Planned
Workers in one recent survey said their planned retirement age was 65 (median age), but actual retirees who were also surveyed said they had stopped working much sooner: at 58 (median age), according to research conducted for the Society of Actuaries (SOA) by Mathew Greenwald & Associates.
Among those who felt forced into an early retirement, the most common factors cited were related to health or stamina and job loss: 27 percent of retirees said the physical demands of their job became too much and 14 percent said they experienced health problems, while 19 percent said they lost their jobs and didn’t have good options for finding new ones, according to the SOA’s 2013 Risks and Process of Retirement survey.(MORE
: Coping With Extremely Early Retirement
A Blessing or a Curse
Losing a job when you’re just a few years out from your planned retirement can be a blessing or a curse, depending on your financial situation. Ultimately, you may find early retirement an opportunity to move into that part-time job
for which you’ve been hankering, to make a career change, or to simply stop working.
But if you don’t have a financial plan in place for retirement, then it’ll be difficult to know exactly where this unexpected job loss leaves you.
“Yes, it wasn’t what you planned, but it may not be the worst thing,” said Eileen Freiburger, a certified financial planner with ESF Financial Planning Group in Manhattan Beach, Calif. “If you have enough non-retirement cash to bridge you, you’re going to be fine.”(MORE
: Laid Off After 50: 5 Dos and a Don’t
Sudden Job Loss Can Upend Retirement Plans
If you don’t have emergency cash reserves, you’ll have to consider your financial situation carefully (more on that below).
“Any time someone is no longer working and getting a paycheck, emotionally it is very, very difficult to go to spending down your assets,” Freiburger said. “That alone is probably the most difficult part for any retiree.”
If you find yourself kicked into retirement earlier than expected, consider these eight money steps:
1. Don’t panic. When faced with an unexpected job loss, people often make quick financial decisions that they later regret. Instead, take a moment to assess your situation.
“A common mistake people make is to start putting things on credit cards to preserve their cash,” said Lea Ann Knight, a certified financial planner with Garrison/Knight Financial Planning in Bedford, Mass.(MORE
: 5 Steps to a More Affordable Retirement
That can easily backfire, leading to a heavy load of high-interest debt. Instead, your first choice for cash should be your emergency savings account. But also consider any work-related severance payments, tap into unemployment insurance and assess whether income from a part-time job might be possible.
“Don’t panic and go cancel your gym membership if you’re the kind of person who goes to the gym every day,” Knight said. “That’s not really discretionary; that’s part of your well-being. People have a tendency to cut those things out quickly.”
2. Assess your cash flow. When her clients find themselves unexpectedly facing an early retirement, Knight has them fill out a cash-flow worksheet. “A budget is really more forward-looking,” she said.
This is simply logging all of your expenses to determine which are fixed and which are discretionary, so you know how much money you need each month. “If you’re working, getting a paycheck every two weeks, you’re not always paying that close attention to your expenses,” Knight said.
A key piece of this, of course, is health-care costs. Figure out whether your health insurance will come via a new job, a COBRA plan from your old job, your spouse’s plan, Medicare or from the new health-care exchanges — and then assess your costs for that plan.
“Understanding what your medical insurance choices are and building that into a budget is really important,” Knight said.
3. Create a retirement plan. Ideally, you created a retirement plan long before your current predicament, but even if you didn’t, it’s not too late to create one. In fact, it’s imperative you do so now, said Artie Green, a certified financial planner with Cognizant Wealth Advisors in Palo Alto, Calif.
That could be a cash-flow plan or a goal-based plan, he said. With a plan based on cash flow, you estimate expenses and income into the future, making assumptions about investment growth and inflation.
Green said he prefers goal-based plans, which are essentially a prioritized list of what you want to do when, and how much it’s going to cost. “You get to specify basically everything you want to do for the rest of your life. You can make that as granular or as broad as you want,” he said.
For example: A retiree wants to be able to travel to visit his two kids — one of whom lives in New York and the other in Hawaii — every year for the next 10 years. Other goals might be covering health-care costs, entertainment. You get the idea.
Once you’ve defined your goals, prioritize them and quantify the costs associated with those goals, Green said. Then you can tweak your plan, reducing costs or increasing income to see what will work best for you.For example, maybe that retiree in the example above visits his children once every three years, instead of every year.
Having a plan allows you to “make some trade-off decisions to see if an early retirement works,” Green said. If you don’t want to give up anything on the expense side, the question becomes: How much money do you need to earn from part-time or full-time work?
The downside is that free online calculators generally aren’t sophisticated enough for this type of planning, Green said. “This is not rocket science,” he said, but “to do it effectively as a goal-based plan, you need software that [is] reasonably sophisticated to be able to integrate all the various assumptions and have the flexibility to allow you to make changes.”
That said, an online calculator is better than nothing. “There’s a great relief in spending a little time in doing a retirement calculation, whether with an adviser or online,” Knight said.
4. Assess income sources. If you’re urgently in need of income and a new job is unlikely, assess your income options carefully. If possible, first tap any after-tax savings you have.
“You want to pull income that’s going to minimize your taxes,” Knight said. For example, she said, if you’re under 59 1/2 and you pull from a 401(k)
or IRA, not only do you face an income-tax hit — which, granted, may not be that much if you’re now in a lower tax bracket — but you also will pay a penalty for early withdrawal.
In an ideal situation, you would avoid tapping your Roth IRA so that it can continue to grow. However, given that generally you’re allowed to withdraw the amount you have contributed without penalty or tax hit, then that can be a good option in an emergency situation.
5. Time to take Social Security?
Most planners urge retirees to delay Social Security
as long as possible, because each year you wait past retirement age, up until age 70, you’ll enjoy a healthy 8 percent hike in your benefit amount. But an unexpected job loss at age 62 or so may mean it’s time to claim your benefits. Or, should you tap retirement accounts first?
“You’re giving up about 8 percent a year if you take Social Security early, [but] if I’m taking money from my IRA, it’s taxable,” Freiburger said.
The right answer will vary depending on your situation, but one way to think about the decision, she said: If you have a relatively short life expectancy and your spouse won’t be relying on your Social Security benefit after you die, then claiming early could make sense in this situation.
If you have a lot of money in an IRA, pulling money from that account may make more sense, because it will reduce the amount you’re forced to withdraw once your required distributions kick in at age 70 1/2. That could mean a lower overall tax bill.
For his part, Green said many people are better off leaving their retirement accounts alone if at all possible. “If you literally have no money and it’s a matter of becoming homeless unless you do that, that’s something else, but in general, the last thing I would do is tap the 401(k) or IRA,” he said.
“The fact that you can borrow money from a 401(k) and pay interest is much less effective than leaving it in there and allowing that money to grow,” he said.
As for Social Security, “Your best option is to wait until age 70, but if you need the money, then tapping into Social Security at 62 is an option that would certainly be worth considering,” Green said.
6. Tap home equity. Once you’re out of work, it’s going to be difficult if not impossible to qualify for a home equity line of credit. Ideally, you should have applied for a line of credit while you had a job. Some home equity lines of credit are offered without an annual fee.
A home equity line usually will charge lower interest rates and fees than credit cards, and you may enjoy a tax deduction, too.
“If you really must borrow some money to get through a shortfall, a home equity line can sometimes be a better source. It is always a good idea to have that in place even if you never draw on it,” Knight said.
Another option: If you or your spouse is 62 or older, you might consider a reverse mortgage, though there are plenty of caveats to research before applying for one of these complex products.
7. Reapply for financial aid. If you have children in college, don’t forget to reapply for financial aid come January, Freiburger said.
“Get your taxes done first thing and contact financial-aid officers as soon as possible,” she said. “You may not be paying that $30,000 college tuition bill. It depends on the college — you never know how much [a change in income] might change your package.”
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