Money Moves to Make if You’re Forced to Retire
Eight smart steps when retirement comes earlier than you expected
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.