What if you are laid off or forced into retirement before 65, or even before 60? If that happens to you, what do you do in response now that the next phase of your life is starting sooner than you planned?
As a first step, gauge where you stand financially. It could be that the full-time job you just left will be your last. It could be that you have been thinking seriously about retirement. Depending on your outlook, you may see your glass as half-empty or half-full – but no matter your outlook, you need to assess your financial position.
With no income from work, your household will be more reliant on your spouse’s income or savings (assuming you are married at the time). So how big is your emergency fund? Is your cash position strong enough so that you can lean on it for a while until you decide how much you want or need to keep working?
Do you want (or need) another full-time job? Do you see yourself transitioning into part-time work? Or are you looking forward to retirement? Regardless of your employment prospects, you will have to calculate the amount of income you receive (or can potentially receive) from other sources – the pension or termination payout you were (hopefully) given, your investments, and other sources of passive income.
If that income doesn’t appear to be enough, should you apply for Social Security as soon as you can? Many financial professionals will tell you no, and here is why: for each year you delay filing for Social Security benefits, your benefits grow by about 8% (from age 62 to age 70). If you were born in 1954 and you file for Social Security benefits at 62 in 2016, you will reduce your monthly Social Security benefit by 25% as a consequence.
On the other hand, some people really need the money and/or are in poor health, so they would rather have the income sooner rather than later. Your projected lifetime Social Security benefit remains the same regardless of when you first file for benefits, so even healthy retirees sometimes sign up as early as they can. In fact, in a June survey of more than 600 retirees taken by the Nationwide Retirement Institute, 76% of Americans who had been retired less than 10 years and 68% of Americans who had been retired 10 years or longer said that looking back, they felt they applied for Social Security at the right time.
Nevertheless, a time like this is a great time to examine Social Security claiming strategies with help from a financial professional – especially if you are married or have been married. The wrong move could leave a great deal 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 Social Security disability benefits or unemployment benefits.
It will not be cheap to secure health insurance if you need it. If you are lucky, you worked for a big company, giving you COBRA eligibility. Maybe you are even luckier – perhaps your employer offered you the option of retiree health benefits when you were hired. (Hopefully, that offer still stands.)
See what you can do to reduce spending & taxes. Leaving work early might mean that your retirement is longer than anticipated. This calls for a reassessment of your retirement income strategy and your probable retirement expenses, including your 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 gifts to children or grandchildren should be ceased. Maybe you could sell the house and move someplace cheaper. Maybe just one car is enough. You could eat out less. Spending less on mere wants is appropriate in your situation.
Every tax dollar you can save is a dollar back in your wallet. So pay attention to investment location and the impact of taxes on your portfolio, as you may be deriving income from investment accounts.
Stay positive. You may not have left work on your own terms, but you have an opportunity I your hands – the chance to change, and perhaps even reconceive, the way you live and work from this moment forward. If you have significant retirement savings, you may even be surprised at the potential your future holds.
About the Retirement Financial Advisor
Robert Pagliarini, PhD, CFP®, EA is passionate about helping retirees build the retirement of their dreams. He has over 25 years of experience as a retirement financial advisor and holds a Ph.D. in retirement planning. In addition, he is a CFP® Ambassador, one of only 50 in the country, and a real fiduciary. His focus is on how to help make retirement portfolios last decades while providing a steady source of income. When he's not helping people plan their retirement, he can be found writing his forthcoming book, The Retirement Myth: Escape Average Retirement & Create a High Performance Retirement. If you would like a second opinion to see if your retirement financial plan will keep you comfortable and secure, contact Robert today.