Early Retirement Brings Big Changes and Many Decisions

June 21, 2017

According to recent studies, 45-50% of Americans today are forced into unexpected retirement before they planned, whether due to health reasons or being laid off from their employers.  Since many such workers are in their late 50’s or early 60’s and in their “peak earning years”, this sudden life event brings many financial changes and decisions that must be made. 

First, it’s important to review your severance benefits from your employer, starting with any last salaries to be paid.  Many larger companies offer a year’s salary as compensation for being laid-off and this can be an important lifeline.  Make sure you’re clear on how the severance will be paid; normal payroll as you’ve been receiving or a lump-sum.  Either way, it’s important to consider the income tax to be withheld to avoid nasty surprises at tax-return filing time.  If a lump-sum severance is to be paid, make sure you be frugal with how you draw down on that sum.  Reviewing your household budget and expenses would also be a prudent undertaking with your family.

Healthcare coverage is the next consideration.  If your spouse cannot add you to their employer plan and you don’t have another job lined up with medical benefits, you may have to consider whether to apply for “COBRA” benefits (which usually come with high premium payments) or seek coverage on your own. Since many workers are laid off well before they qualify for Medicare at age 65, it’s important to make sure you have your medical insurance coverage squared away as soon as possible.

Social Security benefits are another consideration.  If you lose your job and you’re at least age 62, it’s tempting to go ahead and apply for Social Security income benefits right away to help cover your lost income.  That could be a major mistake however, since you could lose between 25-30% of your full retirement age benefit by claiming early.  If you have other retirement savings, such as IRA accounts or 401k savings, it may be better to draw on those first (as long as you are over age 59 ½) before claiming SS early.

Decisions also may need to be made on retirement savings and benefits.  If you are lucky enough to still qualify for Defined Benefit Pension benefits, there will be choices as to when you take your pension, whether to take a lump-sum benefit and roll it over to an IRA account, and if you select an annuity-style stream of income payment, you might need to decide whether to take a full benefit or a “joint and survivor” payment where your spouse receives a percentage of your benefit if you predecease them.  With your 401k/403b and other employer-sponsored retirement savings, you will likely need to consider whether to leave the account with your employer’s plan or take a qualified rollover distribution to an IRA Rollover account.  Bear in mind that either choice has benefits and drawbacks to carefully weigh.

Early retirement may also require a re-visit of your financial plan and retirement income analysis to see how all these choices and considerations affect your retirement plans.  A review with a qualified financial professional can be helpful to understand these choices and make the best decisions going forward.