Forced into early retirement: Are you prepared to cope?
The pandemic, and its impact on the economy, has slowed life down for many people around the world. But for some, it has put them on the fast track to retirement. Here are some things you can do right now to cope if retirement has come around a little more quickly than you anticipated, and to prepare in case it does.
Retiring at 55 is great when it’s part of your plan, but if it’s not, this is when careful financial planning and preparation pays off. Take a step back and look at your complete financial picture. Hopefully you received a severance package from your employer, and perhaps your partner is still working, allowing for some breathing room as you make your next financial decisions. There are six areas of your financial world you’ll need to assess quickly: your assets, debts, the interest rates on those debts, your income and necessary versus discretionary spending.
The pandemic has forced many of us to make lifestyle changes to adapt to the current circumstances. This has presented an opportunity to assess spending patterns and question whether, for example, non-essential expenses could be reduced. In order to determine if you can cover your immediate expenses, you’ll need to take look at all of your sources of income and close any gaps.
If you do not have any other alternatives to access cash for paying your ongoing bills, it might be reasonable to tap in to your 401(k). However, it is worth exploring other alternatives first, and a financial planner can help you think through alternatives, create a budget and make a sound plan. One option could be an emergency fund that you have or other accessible savings, such as nonretirement accounts earmarked for other goals. If you have other income streams set, you could also consider delaying taking Social Security benefits, as you receive an 8% bump in benefits for each year between ages 62 and 70 that you wait to claim it.
Other potential considerations, if your cost of living exceeds your income, could include downsizing, moving to a city with a lower cost of living or taking a part-time job to ease the burden of some of your everyday expenses.
Notice of an early retirement can leave you blindsided, which is why it’s good to practice a “rehearsal retirement” for 6 months or a year beforehand. It can help you decide if you should continue working for a bit longer, if possible, or identify areas where you can make changes in your spending habits.
Shore up emergency funds and commit to saving
Call the financial institutions where you have loans outstanding, including mortgages, and inquire if there is an opportunity to reduce or defer payments. These funds could be used to build up your emergency reserves or to pay down other high-interest debt.
People often think they will begin saving once they pay off their home, or some large debt, but usually this is what we tell ourselves to justify the fact that internally, we either do not want to change our habits or we are not willing to make the sacrifices needed to free up the funds to pay ourselves. There will always be things competing for our money, and if you are a “spender,” a mindful effort must be made to alter your habits and mindset before the outcome will change. It’s never too late to save or adopt good financial practices.
At retirement, liquidity is at a premium and inevitably there will be unforeseen expenses that pop up. For example, your car breaks down, a major home repair is needed or there is an unexpected health-related issue. And those are just the needs — but what about the wants, such as travel and activities? Liquidity is a financial term for “flexibility” and without liquidity in a financial plan, it can be challenging to absorb these unknowns.
When an event happens and there is no liquidity, it can force individuals to rely on consumer debt and credit cards. A common pre-retirement goal is to pay down any debt. If it was difficult to do while you were working, imagine how difficult it is going to be while you are retired.
Earmark healthcare expenses
Unexpected healthcare costs can pose the biggest risk to your retirement plans. If you find yourself suddenly retired, your options may be limited and costly until you're eligible for Medicare at age 65. You can stay on your former employer's plan typically for up to 18 months under COBRA, but you have to pay your employer's share of the premiums on top of your own.
Create a realistic budget
It’s important to start your retirement with a spending plan that works for you and your current situation. Building a budget ensures you have funds to cover day-to-day expenses and long-term payments, such as your credit card and mortgage. Once you’ve updated your budget, any unused funds for the month can be reallocated and applied to pay down debt.
A sudden retirement can be a difficult time to navigate debt, especially if you need credit to stay afloat. If you have multiple credit cards and/or loan payments, create a payment plan to avoid missed payments and pay off high-interest debt first, if possible.
Consider dialing down risk
While you ought to stay invested while you can, you should start adjusting your portfolio for this next phase of life, if you haven't already done so. The 3-5 years prior to retirement and the first 3-5 years in retirement are the most vulnerable time periods for your financial plan and investments.
Financial planning involves setting goals and managing toward these goals even when life changes. It is a fluid process. Shifting to a retirement mindset can take some work, so consider talking with a financial planner about how to best approach this new, and maybe unexpected, phase of life.