No matter how carefully you plan for your retirement, sometimes there are factors beyond your control that can throw your entire plan out of whack. One of those factors is the age at which you stop working. Even if you intend to work for decades longer, changes at your company or a family illness could force you out of your job earlier than you intended. Nearly 4 in 10 workers find themselves retiring earlier than planned, according to a recent study by the Center for Retirement Research at Boston College.1 More than half of those who planned to work past age 66 didn’t make it to that milestone.
If you’re among them, don’t panic. “When life throws something like this at us, the human fight-or-flight response kicks in,” says Alexander Lowry, a professor of finance at Gordon College. “Take a deep breath. Step back. And reassess your situation.” Here’s how to begin:
Claim any benefits for which you qualify
Depending on the cause of your early retirement, you may have access to severance pay, unemployment payments, or disability benefits. While these may not be long-term solutions to your new situation, it’s important to take advantage of any such options that are available.
Figure out your health insurance
If you’re forced to retire before age 65 and you don’t have health insurance coverage via a spouse, you’ll need to buy your own health insurance until you can qualify for Medicare. You may have access to COBRA through your former employer for at least the short-term. If not (or if you don’t like that plan), you can buy insurance on your own through a broker or an online exchange including the state exchanges you can link to through healthcare.gov. Leaving your job for any reason typically counts as a “qualifying event,” which means that you can purchase health insurance outside of the standard open enrollment period.
Determine your monthly income
You’ll want to strategize about how to use the money that you’ve been saving for retirement. One rule of thumb holds that you can draw down 4% of your portfolio (the total amount in all of your accounts) per year, adjusting that amount each year for inflation. You may also want to look into covering your fixed expenses by converting a chunk of your assets into an annuity to provide for a guaranteed stream of lifetime income.
If you’re under age 59.5, you’ll want to avoid taking money out of your IRA or 401(k) accounts, since you’ll owe a 10% penalty in addition to taxes on those withdrawals in most cases.2
Even if you’re old enough to make penalty-free withdrawals, you may want to look at other sources of money first. “See what assets you can tap into with the least possible tax consequences,” says Ed Slott, a CPA and founder of IRAHelp.com. “Distributions from IRAs and 40(k)s are generally taxable, so you get less for your money when you make withdrawals.”
While you can tap Social Security as early as age 62, if you wait to claim your benefits until you hit age 70, your benefits will continue to increase by as much as 8% a year.3
Another potential source of income to consider is a reverse mortgage. They’re not inexpensive vehicles, but may make sense if you’re older, have equity in your home and are planning to stay there for the long-term.
In all of these cases, the financial scenarios get complicated fairly quickly. This is a good time to sit down with a financial advisor to help you chart out the long term as well as make the right decisions in the here and now.
Be open to non-traditional work
Even if you’re not able to do the same work you did throughout your career, there may be ways to bring in additional income. Consulting, working part-time, or taking on gig work may not bring in as much cash as you’re used to earning, but it could give you a lot more wiggle room with your budget or improve your lifestyle. If you don’t have access to health insurance, you might consider a part-time job that includes it.
“Some part-time jobs may not seem like a lot of money, but it can really help fill the gap,” says Roger Whitney, co-author of Rock Retirement: A Simple Guide to Help You Take Control and Be More Optimistic About the Future. “It can also provide a lot of other things. It can give you purpose, take up your time, and give you a new social network.” Any money you’re earning now is money that you can leave in your retirement accounts to continue compounding.
Take a hard look at your spending
Once you’ve figured out where your income is going to come from, you can turn to the expense side of your budget. The good news is that you can automatically eliminate some of the expenses that you faced when working full-time, such as the cost of commuting, business clothes, even saving for retirement.
If there’s still a significant shortfall, you’ll need to look for other areas to cut back. While that may include curtailing expenses like traveling or eating out, you may also need to look at larger changes. Housing represents the largest expense for most retirees4 so slashing that cost—by moving to a smaller home or one in a less expensive part of the country--could have a huge impact on the rest of your budget.
One other area to look at: Debt. If you’re carrying high-interest credit card debt, focus on reducing your interest rates as much as possible, then paying it down ASAP. Getting rid of debt, particularly when it’s of the high interest rate variety, will eliminate a layer of stress from your retirement and give you more flexibility with your finances.
Sure, your retirement may not have started as planned, but that doesn’t mean it’s not going to be enjoyable. Even if you don’t have the budget that you’d hoped, you can make the most of your new freedom and flexible schedule. It doesn’t cost anything to reach out to friends you haven’t seen, volunteer for a cause you care about, or take up a new hobby.
With Beth Braverman
1 “Retiring Earlier Than Planned: What Matters Most?” Center for Retirement Research at Boston College, February, 2019.
2 “IRA and 401(k) Withdrawal Rules and Penalties Understanding Qualified Distributions” the balance, April 2020 https://www.thebalance.com/how-to-withdraw-money-from-a-401-k-or-ira-2894212
3 “When to Take Social Security: 62 vs. 70 Magnify Money by Lending Tree, February, 2019 https://www.magnifymoney.com/blog/investing/when-to-take-social-security/
4 “Major Retirement Expenses to Prepare For” US News and World Report, August 2019 https://money.usnews.com/money/retirement/baby-boomers/articles/major-retirement-expenses-to-prepare-for