Over the past 18 months, from the start of the pandemic, I have had discussions with many of you about continuing to plan for your retirement. Some of you have moved up your initial retirement target date, while others have had to look at delaying retirement. I have always stressed the importance of taking advantage of company sponsored retirement plans that include employer matching, as well as considering opening a Roth IRA or implementing a Roth IRA conversion strategy.
But what happens when something out of your control forces you to retire earlier than what we had initially planned?
According to AARP, a whopping 60 percent of retirees report that the timing of their retirement was either somewhat or completely unexpected.
From company downsizing to health issues, there are a variety of circumstances that can lead to an early retirement, and the COVID-19 pandemic has only amplified this. Since February 2020, the number of retired Baby Boomers has increased by about 1.1 million, according to a Pew Research Center analysis of monthly labor force data, with the job losses associated with the pandemic being a potential contributing factor.
No matter what causes an unplanned retirement, it can be a stressful time, intensified by the uncertainty of money concerns. This is a conversation I have had with many of you already, so I wanted to again share with you some steps to consider to keep you on track if you are blindsided by early retirement.
Take a deep breath
For many in this situation, the instinct is to cash in on any tax-qualified retirement accounts, but before you make any rash decisions, it's paramount to take a deep breath, take an inventory of your overall financial picture and begin to work out a strategy. After all, without steady paychecks coming in, a long-term plan is more important than ever before.
Analyze and strategize
As you take your personal financial inventory, be sure to assess any income, expenses, assets, debts, and interest on debts. Additionally, it's important to think strategically about Social Security benefits and pension, which are the two main sources of regular income for retirees. While you can usually collect these payments early, keep in mind that the earlier you take them, the smaller they will be for the rest of your life.
Income versus expenses
Another important step to take early on is to look at your net-income in comparison to your expenses. Begin by adding up any monthly income you'll receive (Social Security, pension, savings, etc.) and then subtract your anticipated monthly expenses. If there's a gap, you'll want to come up with a plan for how to fill it, whether that means downsizing or taking on part-time work. While the thought of moving into a smaller home or taking on part-time work later in life may not sound ideal to you, keep in mind that delaying Social Security and company pension payments now will mean higher payments later.
Your health is your wealth
When you've gotten used to having employer-sponsored health insurance, losing it can be a shock. After all, healthcare is costly, and nobody wants to blow their retirement savings on unanticipated healthcare costs. As 65 is the age at which you become eligible for Medicare, early retirees will want to come up with some sort of a plan to fill the gap. Consider joining your spouse’s health insurance plan, looking into continuing employer-sponsored coverage, or finding discounted coverage through organizations like AARP.
Should we revisit this together?
Too often, the shock of early retirement clouds the judgment of the retiree, leading to rushed financial decisions that may ultimately do more harm than good. As your financial advisor, I know how hard you have worked during your accumulation years, and now it's time to come up with a plan to stretch your wealth as far and wide as possible. From systematically assessing your sources of income to looking at your tax situation, together we'll put together a tailored strategy to make sure your retirement is working for you, and not the other way around.
If you have found yourself unexpectedly retired, please don't hesitate to reach out.