You’ve Been Forced into Early Retirement – Now What?

These are especially tricky times for workers close to retirement age.

The COVID crisis is forcing many people who expected to work into their 60s or longer to re-evaluate their retirement plans — either because they’re worried about the health consequences or because they lost their job. And it’s difficult to say how many will return to work when conditions improve.

But pre-pandemic research shows that feeling pressured to retire earlier than planned really isn’t all that unusual — even when the economy isn’t as rocky as it is right now. The annual EBRI/Greenwald Retirement Confidence Survey, for example, has consistently found that a large percentage of retirees leave the workforce sooner than they expected.

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In the 2019 survey, 43% of respondents reported retiring earlier than planned, and of that group, 33% said it was because they could afford to do so. Another 35% of the early retirees said they made the decision to retire because of a hardship or disability. And 35% said they retired early due to changes at their company. (Retirees could have retired for more than one reason.)

Perhaps their department was downsized, or their position was eliminated, or maybe they were reassigned to another location. Leaving wasn’t part of their plan, but when circumstances change, pre-retirees often decide their best or only move is to stop working (full-time or altogether) and retire.

If you’re 55-plus and facing a similar decision, and you’re wondering if retiring early is the right answer for you, here are five things to consider.

1. Test your plan to see if you can afford to retire.

An experienced financial adviser using today’s sophisticated planning technology can stress test your portfolio and determine your plan’s strengths and weaknesses. Maybe you aren’t as far away from reaching your goals as you thought. Or maybe working part-time and drawing on your existing funds until you’re eligible for Social Security is a real possibility. You won’t know until you run the numbers.

2. Figure out where you stand with Social Security.

Depending on when you were born, your full retirement age (FRA) for claiming Social Security benefits is between 66 and 67. You’re eligible to claim benefits at 62, but there are several drawbacks to filing early, including:

• The annual earnings test: Each year, the Social Security Administration (SSA) establishes an earnings threshold for retirees who haven’t yet reached their FRA. In 2020, that threshold is $18,240, and the SSA will withhold $1 for every $2 you earn over that amount. Once you reach your FRA, your monthly payment will be increased to reflect the months in which those benefits were withheld. But if you’re planning to freelance or work part-time after claiming Social Security, you’ll have to deal with the income limits imposed by the earnings test.
• A permanent reduction in benefits: Filing for Social Security before you reach your FRA will result in permanently reduced benefits — as much as 25% to 30% less than if you had waited. The only increase you’ll see after claiming is from cost of living adjustments (COLAs). (And you may not see a COLA every year.) On the other hand, if you can wait to file until after you’ve reached your FRA, you’ll earn delayed retirement credits (up to age 70) that can give your monthly payments a significant boost. To determine how long you would have to live to make delaying benefits worthwhile, ask your adviser to run a break-even analysis for you and your spouse.

3. Identify your health care options if you aren’t old enough for Medicare.

Workers who have always had health coverage through their employer are often shocked at how expensive insurance can be when they’re on their own. Your employer may offer continued coverage options as part of a severance package or as a retirement benefit. If not, you’ll have to look elsewhere. One alternative is to check out the Health Insurance Marketplace (better known as Obamacare), at www.healthcare.gov. The amount you’ll pay monthly will be based on the plan you choose and your expected household income for the year.

4. Create a written income plan to transition from accumulation to distribution.

Once you reach retirement, a funny thing happens: Your paychecks stop, but your bills do not. You’ll have to transition efficiently from your employer’s paycheck to your own income streams. A written income plan is designed to outline where your money will come from (retirement accounts, Social Security, maybe a pension or an annuity); when you’ll turn on those various income streams; and what the tax consequences might be as you move through retirement.

5. Consider getting help from a financial professional.

If you haven’t yet met with a financial adviser — someone who is experienced in retirement options — this may be the time to finally make an appointment. A lot of people like the idea of DIY investing, but mapping out your entire retirement future takes planning to the next level. (Think of it like this: You might be able to renovate your own bathroom or build a deck, but are you equipped to draw up the blueprints and build your own house?) Hiring a competent adviser — someone you trust and with whom you feel comfortable — may add significant value to your overall plan and help you stay on track with your retirement goals.

An early retirement doesn’t necessarily have to be a doomsday event. With a good plan in place, you may find the years to come can be more golden than you ever thought.

Kim Franke-Folstad contributed to this article.