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Best financial steps to take when you are forced to retire early

November 22nd, 2016 | No Comment Yet

Author: Samantha Harris

The financial crisis urged many Americans to work longer and retire later to improve their savings. But the reality doesn’t always match our expectations. Sometimes retirement is forced upon us sooner than we expect. It might be our employer, health status, or any other factor. The important thing is that you realize that forced retirement might happen to you as well. 

One study suggested that workers generally believe that they’ll be able to work longer than they usually do. Respondents in a survey considered their planned retirement age at 65 on median, but the actual retirees who were surveyed said they had stopped working much sooner – at 58.

Senior couple sitting in sofa with electronic tablet
Senior couple sitting in sofa with electronic tablet

Some of these retirees chose to retire at an early age, but others were probably forced into an early retirement. What are the main reasons behind retiring early? Among the most common factors are health or stamina, and job loss.

In the survey, 27% of retirees said their job became too physically demanding, and 14% said they experienced health problems. A total of 19% said they lost their job and had limited new opportunities for finding a new one.

According to Employee Benefit Research Institution, 47% of workers were forced to retire sooner then they had planned in 2013.

Here are 7 tips to help you take smart financial steps if you were forced to retire earlier than you planned.

Don’t panic

This is the first step, and it’s incredibly important.

Facing an unexpected job loss, you might make quick financial decisions that you’ll later regret. Many people start putting things on credit cards to preserve their cash. But this can only lead them to the risk of high-interest debt.

Take a deep breath and give yourself time to properly assess your financial situation. Think about potential work-related severance payments, consider unemployment insurance and look into the possibility of taking on a part-time job.

  1. Assess your financial status

Your financial situation might not be as terrible as you believe. You need information, so it’s high time you performed a quick financial assessment.

Here’s how to do it:

  • List your monthly expenses. If you no longer pay a mortgage each month, these might be quite low.
  • List the income at your household. Your spouse’s income might be enough to give each of you a happy retirement.
  • How close are you to your official retirement age? It might be time to start your monthly Social Security payments. If you need this extra monthly income, receiving these benefits a few years early is a potential solution.
  • Were you laid off or fired? You probably qualify for unemployment insurance. That’s another smart source of extra monthly income that might help you to meet your retirement goals.
  • Calculate your health-care costs – consider different plans and assess the expenses they involved.

How long will your money last? Based on your expenses and budget, you should be able to tell how long your money will allow you to continue living your lifestyle. you can start making adjustments on this basis too.

2. Set retirement goals

If you’re forced out of the workforce earlier than you expected, you might need to modify your retirement goals. For instance, if you planned to take a long trip every year, you might need to scale down to four such trips spread out over your retirement period.

This doesn’t mean your retirement will become a drag. You just need to readjust and refocus it to match your current financial situation. Instead of joining a pricey country club, consider taking your golf clubs to public courses in your city.

3. Think about different income sources

If you’re in need of income and not likely to quickly find a new job, you should take a closer look at your potential income sources.

Pull income which will minimize your taxes. That’s why you should first look at your after-tax savings. If you’re under 59 1/2 and you pull from a 401(k) or IRA, you face an income-tax hit and might have to pay a penalty for early withdrawal.

Avoid tapping your Roth IRA to allow it to grow. If you’re facing an emergency situation, you can withdraw the amount you’ve contributed without any penalty or tax hit. 

4. Consider your pension payments

Have you got a pension? If so, you can either take out a lump sum or receive it in monthly installments.

Depending on your situation, both options are worth considering. If you work with a financial adviser or are an experienced investor yourself, you might be able to build on that lump with the right assets. If you prefer to rely on a monthly income, take your pension in installments.

5. Look for a part-time job

If you need some extra income each month, a part-time job is your best solution. Even if it doesn’t come with the benefits of a full-time job, it provides you some extra cash that can help keep your retirement goals alive.

Depending on your sector and experience, you might find a part-time job as a consultant. Perhaps you should consider taking on a position in a new field? This is how you can spice up your life and improve your financial security at the same time.

Let your friends, acquaintances and former colleagues know that you’re looking for a part-time job.

6. Consult with a professional

Even if everything goes according to plan, retirement planning is complex. And how to react if your plans have suddenly changed?

Sometimes it’s best to meet with a financial adviser who will be able to determine the most sensible financial steps you should take in your specific situation. They’ll help you create a new budget and financial plan that matches your case.

Remember to check whether you qualify for free financial advice.

7. When is it time to take social security?

It’s a good idea to delay social security as long as you can. The reason is simple – every year you wait past retirement age (until 70), you get an 8% rise in your benefit amount.

Facing an unexpected job loss at age 61 or similar might mean that it’s time to claim your benefits. If you do that, you’ll be giving up on that 8% a year. If you take money from your IRA, on the other hand, it’s taxable money. 

Everything depends on your situation. If you know that your spouse won’t have to rely on your social security benefit after you die, you can claim it earlier than you planned. However, if you’re got money in an IRA, it makes more sense to pull it from that account.

Key takeaway

Nothing helps to overcome financial challenges like proper planning.

Take these 8 steps to plan a smart early retirement. Just because you were forced into retiring early doesn’t mean that you don’t have any power over your financial situation.

Take control of your savings to build a good future for yourself as a retiree.

About the author: Samantha Harris is a passionate financial adviser and investing experts, currently supporting Market Matters. She is often found reading about new financial trends and sharing her knowledge and ideas with other professionals online.

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