Reaching retirement is something most people spend a good part of their lives carefully planning for, usually with a target date in mind. Whether it’s age 65, 70 or later, there is usually a magic number to “make it to.”
However, like many things in life, expectations sometimes meet reality and plans need to change.
Surprisingly, many Americans are finding themselves faced with the prospect of an early and unexpected retirement. In fact, workers continue to report an expected median retirement age of 65, while retirees report they retired at a median age of 62. Debilitating medical conditions and layoffs from work are two of the primary reasons why retirement might come earlier than planned. In the case of a medical issue, suddenly being faced with a health condition that will not allow you to effectively work full-time, or at all, can bring an abrupt end to a career. Also, as people get closer to retirement, the probability of a health issue arising increases given the aging process.
Layoffs have become an unfortunate but regular part of corporate America, and while anyone could be vulnerable, those closer to retirement might be particularly susceptible. More seasoned and experienced workers tend to come with higher salaries, which can make for easier cost-cutting. There are certainly possibilities for finding a new job, but that may take longer than anticipated. Also, it is not uncommon for those who are let go closer to retirement to struggle regaining employment at all.
[See: 7 Investment Fees You Might Not Realize You’re Paying.]
What is the best way to prepare for an unknown such as an unexpected early retirement? Here are some tips to keep in mind.
Expect the best, but prepare for the worst. Before an unexpected retirement presents itself, think through this “what if” scenario and what can be done now to prepare. What might life look like if you are forced to leave the workforce earlier than planned? Much like regular retirement planning, consider potential sources of income and weigh that against already anticipated expenses as well as potential new expenses such as added health care or insurance costs. Remember that before age 65, Medicare is not an option. Also, not being employed means either finding a private health insurance plan or utilizing COBRA through a former employer, which is only temporary and can be expensive. State exchanges could be an additional option, but the quality of programs may vary significantly by state.
Consider the new length of your retirement. A planned retirement of 20 to 25 years may have just stretched to 30 years, yet the amount of available planned funds remains the same. This can result in two choices: Change your lifestyle to meet the new budget or increase the amount of available funds. Changing lifestyle is a personal choice and there are corners that can be cut to make it work. Perhaps there will be less travel or fewer rounds of golf. However, the impact could be much more severe. For example, downsizing to a smaller home or needing to rent might no longer be a choice, but rather something that is imperative to make ends meet. In addition, going from multiple vehicles to one might need to be a consideration.
If increasing funds is a more appealing choice, actions you can take now include setting a more aggressive budget and putting more money aside to maximize savings. Ideally, extra savings should be put toward additional contributions to a 401(k) or individual retirement account. However, a “rainy-day” savings fund is an alternative option. Proceeds from this fund can be invested with the help of a financial professional dependent on investing goals and risk tolerance.
[See: 11 of the Best Fixed-Income Funds to Buy.]
From a non-financial, career-related standpoint, a tip for right now is to network. There is a prevalent misconception that networking is only for those who are early- to mid-career. However, networking during the latter stages of a career is just as important and is the most likely source for finding new employment when a person is let go by a previous employer.
If it happens, what’s next? If an unexpected retirement becomes a reality, do not make any moves until thoroughly assessing potential next steps. From a financial standpoint, look at current spending and income and develop both a new short-term and long-term budget. Based on this budget, assess any possible lifestyle changes that might make the new bottom line more attainable.
Looking out over a longer horizon, take inventory of all retirement funds and project your monthly or annual income with the new retirement timeline in mind. If you are not able to work due to a disability, consider how Social Security payments will change given the new situation. (Regular Social Security payments are not available until age 62.) Also, think twice before beginning any early withdrawals from retirement accounts. While it might be an easy option to increase immediate cash flow, the tax consequences may be severe and can take a large chunk out of an overall retirement nest egg. For example, for those younger than 59½, there is a 10 percent early withdrawal tax on IRAs.
From a non-financial standpoint, use the opportunity to think about all of your options, including going back to work, or if able, early retirement. While an early retirement might be unexpected, it does not need to be a negative thing. It might be an ideal time to consider other options such as part-time work in another field of interest. Many have found that returning to work not only can be financially beneficial, it may offer a renewed sense of purpose and control over one’s retirement destiny.
[See: 9 Ways to Avoid 401(k) Fees and Penalties.]
With proper planning and forethought, even an unexpected and early departure from the workforce will not stand in the way of attaining a secure and comfortable retirement.
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How to Prepare for an Early and Unexpected Retirement originally appeared on usnews.com
