You spend decades of your life working toward the goal of retiring someday. There’s a ton of guesswork involved about when it will happen, how much you’ll need each year and even how long you’re expecting to live.
But when retirement happens sooner than you anticipated — due to a layoff, health issue or some other life event — your decades of retirement planning gets thrown off course.
Suddenly, your time to save is over. Now you have to make less money last even longer than you’d imagined.
10 Steps to Take When You’re Forced to Retire Early
Whether you’ve been forced to retire early due to circumstances beyond your control or you’re preparing for a worst-case scenario, know you still have options for a financially sound retirement. Follow these steps to help you adjust your plans.
1. Find Affordable Health Coverage
When you have to retire early, you’re hit with a big unexpected expense: paying for your health care, since most people aren’t eligible for Medicare until age 65.
“Paying for individual health insurance on one’s own is more expensive than most people budget for,” said Mitchell Kraus, a certified financial planner and registered principal with Capital Intelligence Associates in Santa Monica, California. “If you add in the higher deductibles and co-pays, in most individual and family health plans the costs can be a budget buster.”
If you worked for a company with 20 or more employees, you’ll probably have the option to continue your coverage under COBRA, or the Continued Omnibus Budget Reconciliation Act, for up to 18 months. However, this is an expensive option. You’ll be on the hook for both your share of the plan’s cost and your employer’s share, plus a 2% surcharge.
The federal health insurance marketplace offers a variety of plans at differing levels of coverage and cost. It’s worthwhile to shop there. Depending on your income, you may qualify for a subsidy to help pay for your insurance.
“If money is tight, knowing what subsidies might be available in your state through the Affordable Care Act can save your overall financial well-being,” Kraus said.
2. Apply for Unemployment if You’ve Been Laid off
If you’ve decided to retire because of a layoff, make sure you take advantage of any unemployment benefits you qualify for, even if you don’t plan to return to the workforce.
If you lost your job earlier in 2020, you may be able to retroactively apply for unemployment. As of this writing on July 24, the $600 a week federal unemployment bonus is about to expire, but you can still apply for state benefits — though some states may require you to still look for work.
Unemployment benefits aren’t going to be much help in the long run. But they can be a valuable lifeline if they buy you time to think through major decisions about your Social Security benefits and retirement accounts.
3. Make a Budget for Your Retirement Life
A rule of thumb in financial planning is that most retirees will need to replace about 70% to 80% of their pre-retirement income.
You may need less if you’ve paid off your mortgage and have no other debt. Or you may need significantly more if you have major health expenses or children who still live at home.
Before you make any big decisions about your money, create a retirement budget that accounts for your new lifestyle.
You may need to budget more for certain expenses, like health care, but you may also find other expenses you can reduce or eliminate altogether. For example, if you’re a two-car household, maybe you and your spouse can get by with a single vehicle since you’re no longer commuting.
We get that estimating your needs can be a challenge when you’re newly retired, especially during a time of widespread uncertainty. One solution is to make three budgets so that you have a plan for lean times, good times and somewhere in between.
4. Review Your Mix of Investments
“The strategies used to save for retirement are very different than those needed when living on these assets,” said Mark Wilson, CFP and president of MILE Wealth Management LLC in Irvine, California. “Protect one to three years’ of your projected spending in cash-like investments; invest the remainder in an asset mix that has some growth opportunities.”
One part that gets tricky: You can’t afford as much risk once you’re retired as you could during your working years. But you also can’t afford not to take some risk. You need your money to earn income so you don’t eat away at the principal.
5. Decide Which Retirement Accounts to Tap First
If you leave your job for any reason when you’re 55 or older, you’re allowed to tap into your current 401(k) without paying a 10% early withdrawal penalty, though you’ll owe income taxes unless you have a Roth 401(k).
Note that this rule doesn’t apply to 401(k)s you have with past employers. For old 401(k)s and traditional IRAs, you have to wait until you’re 59 ½ to withdraw money in most cases to avoid the 10% penalty.
Your Roth IRA provides tax-free income when you withdraw it, provided that you’re 59 ½ and you’ve had the account for at least five years.
If you have multiple retirement accounts, it’s essential that you review your situation with a tax professional to determine how to minimize your taxes. You may also want to discuss whether to roll over your 401(k) into an IRA.
6. Make a Plan for Taking Social Security
If you have a serious cash shortfall, you may not have the luxury of waiting until you’re 67 or 70 to collect a higher Social Security benefit. But for most people who have other sources of income, it pays to delay for as long as possible.
When you take Social Security when you become eligible at 62, your monthly benefits will be about 30% lower than they would be if you waited until your full retirement age of 66 or 67. Each year you wait beyond that will push your benefit up by another 8% until you have to start taking it at 70.
There are some circumstances when claiming your benefits earlier does make sense.
“The two big exceptions are when your life expectancy is below average or if you will incur debt that must be repaid to pay current bills,” Kraus said. “Individuals should look at their tax bracket and decide if it is best to take some money out of retirement plans or out of savings. They should review their budget and their emergency reserves.”
7. Look for Part-Time or Freelance Work
You can find ways to earn extra income without going back to working 40-plus hours a week. You could find a work-from-home job or find a side gig, like online tutoring or delivering groceries, or you may be able to do freelance or consulting work in the field you retired from.
Earning extra money will pay off big time if it helps you delay Social Security. But if you’re already getting benefits and you haven’t reached your full retirement age, be aware of Social Security earning limits that could temporarily reduce your benefits.
8. Talk to Your Kids About Your New Normal
A 2015 Pew Research poll found that 61% of adults in the U.S. say they help out their adult children financially. If you’re among them, you need to have a frank talk with your children about how your financial situation has changed.
If your kids turn to you when they need help in an emergency, it’s best to have the conversation now — as in, before an emergency happens — about how you can no longer afford to be the person who bails them out. While this may be difficult, securing your own future so you don’t need to depend on your kids someday is the best thing you can do for them in the long run.
9. Downsize if You Need to Reduce Expenses
If your income sources aren’t enough to make ends meet, it may be time to downsize by moving into a smaller home or an area with a lower cost of living. If you don’t want to leave your home, renting out a room or getting a reverse mortgage could be options.
10. Find Something You Truly Enjoy
Retirement doesn’t just change your finances. It’s a complete change of lifestyle.
“The first question one usually asks someone they meet is, ‘What do you do?’” Kraus said. “Work also takes up about half of most adults’ waking hours when you include the time to get ready, commuting hours and time spent thinking about one’s job.”
Retirement can be isolating. You no longer have daily interactions with co-workers and clients. Plus, it leaves you with way more time on your hands. It’s essential that you find hobbies and ways to stay connected with others.
Knowing how you plan to fill that time will not only make you happier — it can also help you budget better, according to Kraus.
“A retirement of gardening and playing bridge has a very different price tag than a retirement of travel and golf,” he said.
Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected]