What if you were laid off and forced to retire early? If that happens tomorrow how would you respond? Are you prepared for retirement to start sooner than you anticipated?
If you find yourself in this situation the first thing to do is gauge where you stand financially. It could be that the full time job you just left will be your last or maybe your were already considering when to retire. Depending on your outlook you may see the glass half-empty (or half-full) – either way, you need to be aware of your financial position today. How big is your emergency fund? Are your cash reserves strong enough to support you while you decide how much you want or need to keep working?
Do you need another full-time job? Do you see yourself transitioning into part-time work? Or maybe you are prepared for retirement and welcome the early departure. Regardless of your employment prospects you’ll want to calculate the amount of income you can expect to receive from other sources – pensions, retirement savings, a potential termination payout and any other sources of passive income such as rental property.
How about Social Security? This is a time to compare your options of claiming early, at full retirement age or delaying as long as possible. Consider your families health history and longevity. For each year you delay filing for Social Security benefits, your benefits grow by about 8% (from age 62 to age 70). If you file for Social Security benefits at 62 you may reduce your monthly benefit amount by as much as 25%, that has a big impact over time. On the other hand, some people really need the income or are in poor health. In that case it may be better to receive something rather than nothing at all. Believe it or not your projected lifetime Social Security benefit remains the same regardless of when you first file for benefits. That’s because the calculations are based off average life expectancies, if you live passed the assumed mortality age you’ll end up with more the longer you delayed.
Taking time to evaluate Social Security claiming strategies is a good idea and don’t be shy to seek help from a financial professional – especially if you are married or have been married in the past. Making the wrong decision could leave a lot of money on the table.
Can you take advantage of any benefits as you leave work? Talk to the HR officer. If you have not been informed of your eligibility for severance pay or an early retirement package, ask about it. Depending on the circumstances of your exit, you may also qualify for unemployment or Social Security disability benefits. Be sure to ask about COBRA through the company health plan, if it’s too costly you can purchase an individual policy through a health insurance exchange and possibly qualify for a credit. There’s also the possibility your employer offers retiree health benefits, such is the case for many government employees. Most importantly ask questions and leave no stone unturned.
Reducing spending & taxes is key. Leaving work early might mean that your retirement is longer than anticipated. This calls for a reassessment of your probable retirement expenses, including your current day-to-day spending habits. What fixed expenses are non-negotiable? What can you trim? If you are married, you and your spouse should be on the same page regarding how much you spend and what you spend money on. Perhaps you could sell the house and move someplace cheaper. Maybe just one car is enough. You could cook more at home and eat out less. Spending less on mere wants is a good idea.
Taxes can also have a huge impact on your retirement. Every tax dollar you save is a dollar you keep. Pay close attention to the types of investments you hold and understand how they are treated for tax purposes. If your holdings appear to be the same in both retirement and non-retirement accounts then your retirement investment strategy isn’t tax efficient and should be reviewed. There are also important rules to consider when rolling over funds from pension and 401(k) accounts, seek help from a qualified professional, be careful relying solely on family and friends for investment advice.
Stay positive. You may not have left work on your own terms, but you have an opportunity to change the way you live and work from this moment forward.
Stressed Eggs by Bernard Goldbach