Many people expect they can set a date on when to quit full-time work for good, but sometimes retirement comes sooner than expected.
Most Americans target their retirement age as 65, since it’s a long-held societal notion. Ending work sooner — whether intentional or not — can have significant financial impacts, especially since the final work years are when most people reach their highest earning potential. Retiring early means no longer funding a 401(k); but retirees can tap their Social Security as early as age 62. The full retirement age, where you can claim 100 percent of your benefits, is based on your birth year, and will be raised to 66.5 in 2019.
Early retirement, especially when unplanned, happens quite often. In a 2016 study published by Transamerica Center for Retirement Studies, 60 percent of retirees left work sooner than planned. Among retirees in their 50s, 79 percent retire early. That number drops slightly among retirees in their 60s at 67 percent.
Reasons for early retirement varied from employment-related reasons to health issues, the report shows.
“A lot of times retirement happens to you. It’s not really an active decision on your part,” says Jason Friday, head of wealth management planning at Citizens Bank.
When early retirement is a possibility, here are three actions to take:
— Meet with a financial planner.
— Consider other work options.
— Find out your health care options.
Meet With a Financial Planner
Catherine Collinson, CEO and president of Transamerica Institute and Transamerica Center for Retirement Studies, says put together a financial picture by creating a personal balance sheet that tallies up all of your savings, assets, liabilities and debt.
“It’s critical that they get their financial house in order,” she says.
Companies that offer 401(k) or 403(b) plans often have resources for workers to talk about financial transitions and how to make their savings last, she says.
Friday says prospective retirees should meet with their financial advisors to avoid any rash money moves and become better organized. Experts say advisors can do a gap analysis to determine one’s needs moving forward and identify any gaps between income sources and other resources.
“There you can start looking at planning opportunities that really prioritize what those needs, wants and wishes are in retirement,” Friday says.
An individual’s retirement age and the type of savings accounts matter, says Albie MacDonald, managing director at MAI Capital Management in Ponte Vedra Beach, Florida. It’s important to know if the funds are in qualified plans like 401(k)s or individual retirement accounts versus nonqualified savings, such as brokerage or money market accounts, before tapping those funds — especially if someone is younger than age 55.
Tim Steffen, director of advanced planning at Baird in Milwaukee, says to tap into an employer plan like a 401(k) without incurring a penalty, a person has to be at least age 55 when separating from an employer. To access an IRA, an individual needs to be at least age 59.5.
“It’s really important to just do a deep dive into what assets you have, where they’re held, know what your expenses are, what are your sources of income — if you have any — and then from there begin to develop that plan,” MacDonald says.
Consider Other Work Options
For individuals who have been laid off, Collinson and Steffen say to look for employment, even in another field — especially if there’s not enough in savings. They say to wait to tap into Social Security or other funds. The current tight labor market may work may be favorable for a change in career. But the caveat may be accepting lower pay.
“It may not seem like the ideal solution; however, it’s much better than running out of savings 10, 15 years from now when you have a harder time” returning to the workforce, Collinson says.
Steffen notes many more jobs can be done at home, something older workers may not realize if they’ve worked in an office their entire life. Seeking other employment may depend on one’s health or other circumstances, such as leaving the workforce to take care of a family member. If it’s the latter case, Steffen says talk to the employer before deciding to leave entirely.
“Employers, we’re finding, are going to be a lot more flexible in trying to (create) an arrangement that works for both sides,” he says. “Employers recognize the value of these experienced veteran workers.”
When retiring early because of a health reason, options for doing additional or different work may be limited, MacDonald says. But if possible, it’s worth checking what occupations can be done from home to bring in income, he adds.
Find Out Your Health Care Options
When retiring before age 65 with a clean bill of health, it’s necessary to find health care coverage, as Medicare doesn’t kick in until that age. Look into coverage from a spouse’s plan if possible, otherwise it may be necessary to look for private insurance or a plan available through a health care exchange. Individuals with lower incomes may qualify for subsidies. But no matter where someone looks for health care coverage, it’s important to prepare for some sticker shock.
“I don’t think people realize how much employers pay for health insurance until people have to pay it themselves,” Steffen says.
For those who are retiring early for health reasons and are under age 65, depending on the severity of their health issues and income sources, Medicaid coverage is a possibility, experts say.
Also depending on someone’s circumstance, retiring for health-related issues is one of the few times financial advisors say taking Social Security at age 62 is a viable option. In general, most advisors frown on healthy people who have financial means from taking Social Security early, since it lowers the monthly payment. But for someone with a terminal illness who lacks other means, it’s a lifeline.
“Typically I wouldn’t recommend that,” Steffen says, “but sometimes you gotta do what you gotta do.”
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