Take the time to design an alternative retirement plan should retirement come earlier than expected.
Imagine this. You’ve spent decades working, saving and planning for your version of the ideal retirement.
But life decides to throw a little kink into your plans. Your company was just acquired, and your boss is now strongly encouraging you to take an early retirement – five years before you’re ready.
So, What Now?
Well, first recognize that you’re not alone. Less than a quarter of American workers plan to retire before age 65, but almost half end up doing just that, according to the Employee Benefit Research Institute’s 2014 Retirement Confidence Survey. And most of them retire early through no choice of their own. The reasons vary – a personal or family health issue, loss of a job, burnout. The good news is you don’t have to be a victim of your circumstances should this happen to you. But, you will have to make some adjustments.
That retirement plan may need to be revised to account for poor health, higher expenses, lower income or simply having to stretch your nest egg over a few additional years.
Here’s what you can do to help yourself rebound financially and find a new path to the retirement you envisioned for yourself.
- Adjust to Your New Normal
The retirement transition can be difficult for anyone, but especially so for those who feel unprepared. During what may be a stressful time, it’s important to step back and take stock before making rash decisions. You should:
Don’t panic and make quick decisions you might regret, like immediately taking Social Security or putting everything on credit, which could land you with a lot of high-interest debt later.
- Get Health Insurance
If you’re under 65 when you leave your job, your first priority should be finding health insurance since you likely are not yet eligible for Medicare. You may be able to join COBRA, a spouse’s plan or find coverage through an Affordable Care Act healthcare exchange.
- Evaluate your Savings and Income Sources
These include retirement assets, spouse’s income, Social Security, pensions, rental income, disability or life insurance policies. You’ll need to determine if those sources can cover your current living expenses.
- Think Twice about Social Security
Deferring Social Security benefits typically increases your payments, so it may make sense to spend from other savings accounts first, although you’ll need to account for taxes and potential early-withdrawal penalties if you use your retirement accounts. But if you really need a source of reliable income, talk to your financial advisor about applying for Social Security benefits sooner rather than later. He or she can help you determine the best withdrawal and filing strategy for your new circumstances.
- Revise your Spending Strategy
A longer retirement means your savings must last longer than originally intended and you’ll have fewer years to fund it, so it’s critical to create a new budget to match your income. Look carefully at each essential and discretionary expense and determine where you can make adjustments to save costs. Certain adjustments may be easier now that you have more time to plan meals and cook for example. If you were originally planning to spend 4% or 5% of your savings each year after retiring, you may need to adjust that percentage downward.
- Rethink your Asset Allocation
Any time you experience a major life change, you should revisit your asset allocation and investments. Talk to your advisor about alternative sources of secure income that meet your particular risk profile.
Once you’ve laid the groundwork for your new life in retirement, consider what’s next for you and your family. You could:
- Start Job Hunting
Many people believe that finding a new job can be difficult in the later stages of life. But, it’s not impossible to find a part-time or contractor position that can help bridge any income gaps. That may not be ideal, but any job that brings in even $10,000 a year can help significantly. That’s the same as a 4% annual withdrawal on a $250,000 portfolio.
- Live Within your New Budget
If you can’t find a new job or are unable to work, create a new budget and live within it. Adjusting your lifestyle to fit your finances is paramount to moving forward. Consider this: Moving to a less expensive locale, one without an income tax for example, could allow you the financial freedom to live the retirement lifestyle you had originally planned for.
- Change Direction
Losing a job when you’re just a few years out from your planned retirement may be a blessing in disguise, depending on your financial situation. Your new circumstances may prompt you to pursue hobbies, seek a career change, chase an entrepreneurial dream or volunteer with your favorite charity.
- Update your Financial Plan
Once you’ve come to terms with your new life, revisit your retirement and other goals to make sure your plan reflects your current needs and wants. You may have to make some tradeoffs in order to accomplish your goals.
Forced early retirement may not be in the cards for you, but it can’t hurt to prepare for the eventuality that something might come along to alter your retirement plans.
There are a variety of simple strategies to help you increase your retirement security. For instance, an emergency fund can create a financial cushion if and when you need it. If you can’t afford to set aside cash, think about alternative sources of liquidity such as home equity or securities based lines of credit, which typically carry lower interest rates than credit cards. You may be able to get a tax deduction, as well. A word of caution: It’s much harder to qualify for a line of credit if you’re unemployed. Consider having a line of credit in place even if you never need to use it.
Another bit of advice? Save early and save often. Retirement is a big goal for many of us, so saving as much as possible in dedicated retirement accounts can give you quite a head start even if you have to retire earlier than expected. Maximize your contributions to 401(k)s, IRAs or Roth IRAs, then incrementally increase your savings rate each year. If you’re age 50 or older, take advantage of catch-up contributions, which allow you to save an extra $1,000 a year in qualifying retirement plans. The power of compounding has the potential to turn your diligent saving into a comfortable nest egg that could mitigate the impact of a forced early retirement. You’ll also want to proactively reduce debt.
And since health is a major reason that people leave work, do what you can to take care of yourself, physically and mentally. That means getting preventive care, eating well, exercising and getting enough rest.
Challenges and Opportunities
Retiring can be challenging for anyone, especially so if you don’t have much say. But as we mentioned before, there are ways to take back control and move forward, with the help of your professional advisors. Once you get over the challenges of planning for the unexpected and revise your retirement plan accordingly, look for opportunities to make the most of your, perhaps unwanted, fresh start. The future may be brighter than you ever imagined.
- Ask your advisor about running hypothetical scenarios to test how long your retirement savings will last.
- Consider how you can reduce living expenses and debt.
- Revise your retirement income and spending strategy with the help of your financial advisor.
Material prepared by Raymond James for use by its financial advisors.
Asset allocation does not guarantee a profit nor protect against loss. A securities based line of credit may not be suitable for all clients. The proceeds from a securities based line of credit cannot be used to purchase or carry margin securities. Borrowing on securities based lending products and using securities as collateral may involve a high degree of risk. Market conditions can magnify any potential for loss. If the market turns against the client, he or she may be required to deposit additional securities and/or cash in the account(s) or pay down the loan. The securities in the pledged account(s) may be sold to meet the collateral call, and the firm can sell the client’s securities without contacting them. The interest rates charged are determined by the market value of pledged assets and Capital Access. Securities based line of credit provided by Raymond James Bank. Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are affiliated with Raymond James Bank.
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