How to Prepare for an Early or Unexpected Retirement
More than half of all Americans end up retiring earlier than expected - even if they don't want to. So how can you prepare for an unexpected retirement?
Planning for retirement is without a doubt a long-term project that takes years of saving and adjusting to prepare for successfully. It certainly isn’t a fix-it-and-forget-it endeavor. But no matter how well you prepare or how diligently you save, the reality is that health issues, company downsizing, a worldwide pandemic, or simply personal preference may put you face to face with an early or unexpected retirement.
How common is retiring early? Perhaps more common than you might think. According to a new study by Allianz Life, more than half of Americans retire earlier than expected and for reasons outside their control. What’s even more interesting about this data is that it was collected before the spread of the COVID-19 virus when major businesses and companies facing economic struggle began offering voluntary buyouts and early retirement packages to their employees. This may suggest, then, that individuals around the world could be retiring sooner than planned for a number of reasons.
So how can you prepare for an unexpected retirement? Of course, you’ll always want to consult with your financial professional before making any life-altering decisions, but here are some items to consider should you find yourself in this position.
1. Plan Your Exit Strategy
Leaving the workforce is a process that involves far more than packing up your desk on your final day and heading for the door. Besides your steady paycheck, you’ll be leaving behind other employer-related benefits such as health insurance coverage and retirement account matches. In order to receive all your benefits, especially in a profit-sharing situation, for example, you’ll need to time your exit strategy with care. Do you have paid leave you can cash out? If so, when are you eligible to do so? Take advantage of all your benefits before leaving. After all, you earned them!
3. Consider the Tax Implications of Retirement Plan Offerings
The structure and value of retirement plan options can vary greatly from employer to employer. If you are choosing to retire voluntarily, that is you aren’t being offered a buyout or early retirement plan option, you’ll likely be able to choose between taking a lump sum up front or phasing out your retirement benefits over time. Of course, you’ll need to decide which option best aligns with your other retirement income sources and how the tax treatment will affect your after-tax, take-home amount. For example, if you expect to have a higher income down the road, you may choose the lump sum option now rather than later when the extra income could bump you into a higher tax bracket. In reverse, if you anticipate having a lower income later, you may decide phasing your benefits out is a better option.
3. Align with Your Spouse
Your ability to manage your income and mitigate your tax burdens can largely determine the longevity of your retirement savings. Therefore, if you are married and pool your income with your spouse, you’ll want to align your retirement plan options with theirs. Planning together will give you the highest probability of success for maximizing your long-term income, making the most of your Social Security benefits, and managing taxes over time.
4. Decide on Healthcare Coverage
You’ll want to make sure you have healthcare lined up so you don’t suffer a lapse in coverage. If you aren’t yet eligible for Medicare, you will need to decide whether it is more beneficial to purchase your own individual insurance or extend your employer coverage through COBRA. Keep in mind, COBRA coverage is only available for a limited time after you leave your job so you’ll want to make sure it bridges the time gap you need beforehand.
Taking the Leap
Facing an early retirement may not be in your plans, but external forces outside your control could force this to become a reality. In the event you are faced with this decision, be sure to consider all the short and long-term consequences of your actions. No one wants to outlive his or her assets or become a financial burden on their family.
Curious if an early retirement could be in the cards for you? Contact us today to speak with one of our trusted advisors and learn about your options.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2023 Advisor Websites.