While a majority of Americans (74 percent) plan on working well past retirement age, 61 percent of current retirees say they were forced to retire sooner than they’d planned.1, 2 Whether due to layoffs, age discrimination, health problems or caregiving responsibilities, retirement intent and retirement reality don’t always align.
It’s critical to have a thoughtful and comprehensive financial plan, but it’s also important that you realize plans are merely blueprints. Inevitably, somewhere along your financial journey, the unexpected is going to arise. You therefore need to have contingencies in place to effectively deal with these unpredictable obstacles.
Start by working with your advisor to build a clearer picture of your expected retirement spending. Categorize and estimate your essential nondiscretionary expenses (food, housing and healthcare) along with your more discretionary expenses such as travel and entertainment. The goal is to get a plan in place that ensures you can cover the critical expenses you need to live in the event retirement occurs earlier than expected.
Building a strategy to cope
Whatever the cause, an unexpected retirement takes a double toll on your financial life—both reducing planned future income earmarked for retirement, as well as potentially forcing you to tap into existing retirement savings. It’s therefore important to be realistic and realize that an early retirement may necessitate reassessing your retirement goals and modifying your plan accordingly.
Your initial instincts may tell you to liquidate investments and move them into cash in case you need to tap into savings to replace lost income; however, that may just worsen the situation. By doing so, you’ll be sacrificing significant investment growth and compounding potential that could seriously compromise your future plans. Stay appropriately invested; there are other ways you can hedge against or address an unexpected early retirement:
1. Build up a sufficient emergency fund. While it’s often suggested that younger workers put aside enough cash to cover six months of living expenses, as you near traditional retirement age you’ll need more. Our advisors recommend that your emergency fund from your mid-50s onward should be enough to offset one to three years of income to protect your retirement savings in the event of illness, disability or downsizing.
2. As you get older, the potential for a disability to temporarily or permanently interrupt your career increases. Considering that the average long-term disability claim period lasts 2½ years, an individual disability insurance policy may help ensure that you’re adequately protected.
3. Although not ideal, if you are age 59½ or older, you can begin making withdrawals from tax-advantaged retirement accounts without incurring the IRS’ 10 percent early distribution penalty (although you will still be required to pay income taxes on any distributions). Additionally, 401(k) and 403(b) participants who are 55 or older can take a one-time penalty-free distribution from their plan when leaving their firm.
4. If you haven’t yet reached age 59½, there’s also a way to tap into your IRAs without incurring penalties. IRS Rule 72(t) permits you to take penalty-free withdrawals from IRAs and other tax-advantaged retirement accounts as long as you withdraw substantially equal amounts annually for a period of at least five years or until you reach age 59½ (whichever is longer).
5. While “full retirement” age for Social Security currently stands at age 66 (age 67 for those born after 1959), you can opt to take early benefits beginning at age 62. By electing to claim early Social Security benefits, however, your benefit will be permanently reduced (by up to 30 percent depending on how long you live). While it’s certainly not an optimal solution, and likely not what you anticipated doing if you planned on working well past retirement age, if you need to generate income it may be preferable to raiding your retirement accounts.
Nobody likes to think of being forced to leave a career unexpectedly. For a variety of reasons, though, it’s a possibility that needs to be acknowledged and for which to plan. Most importantly, the sooner you begin your preparations, the more options you’ll have and the less likely that even an unwelcome disruption won’t derail your retirement plan. Now is the time to sit down with your advisor and explore the various ways you can better prepare for whatever the future may hold.