Being forced to retire ahead of your preferred timeline typically triggers strong emotions, according to Jim Beverley, financial adviser for Partners Wealth Management, Naperville, Ill.
Setting those emotions aside while you make a realistic assessment of your situation is crucial.
Beverley advises people facing a forced early retirement to make a list of "the real numbers" so they can make informed decisions.
Start by listing your assets, including current and potential sources of income. Next, list your liabilities, including debts, exposures to risks or lawsuits, and anticipated major expenses.
Early retirement offers the gift of additional free time.
"Get a good, clear picture of where things sit," Beverley says. "With a clear perspective, you're empowered to make better decisions."
Now you're ready to examine options for meeting your financial needs. As you ponder the possibilities, consider how each decision could affect your overall situation in areas such as insurance, estate planning, and tax obligations.
"If you make a decision in isolation, you put other strategies at risk," Beverley says. "For example, if we turn up the income stream by starting to draw on retirement assets, how does that impact your income tax situation?"
Answer essential questions
As part of your financial assessment, answer these critical questions:
- Do you have health insurance? Retiree health benefits that last until age 65 are uncommon. Federal law allows you to purchase health insurance from your employer for up to 18 months after your job ends, although it's likely to be costly. Develop a strategy to obtain benefits until you qualify for Medicare and can purchase supplemental insurance at age 65. You may need to find a job that provides access to benefits, for example, or research the cost of buying individual insurance.
- When will you file for Social Security? Filing at age 62 provides steady income but reduces your monthly payment. The Social Security Administration offers information about the impact of filing early. If you plan to file later, you may need a strategy to increase income or reduce expenses in the meantime.
- How can you maximize pension benefits and/or investments? Check your plan documents to learn how much pension payments are reduced if you begin collecting at a younger age. Protect your spouse with life insurance if all or some pension payments end when you die. If you are relying on retirement savings, aim to draw on these savings at a rate that enables them to last throughout your lifetime.
- "With a clear perspective, you're empowered to make better decisions."How can you exchange what you have for what you need? If you need income, you might be able to start a business or get a part-time job. If your home needs renovation and you're a do-it-yourself expert, figure out what you can do alone and what requires help. If you have a significant amount of money in savings but need an income stream, you might want to buy an annuity. If you own your house but lack funds, a reverse mortgage from a reputable lender might be an option. Think creatively to achieve your goals.
Consider all options
Beverley says making your assets stretch throughout a longer-than-anticipated retirement might require changing your lifestyle.
Instead of living in a single-family dwelling, for example, you might move to a condominium, to an apartment in a senior community, or even to another state where the cost of living is lower. Instead of traveling the world, you might visit friends or relatives.
"Nothing can be out of bounds," Beverley says. "Sometimes couples incur therapy costs for their relationship because of the conversations they are forced to have to make their money last."
Early retirement offers the gift of additional free time to explore interests or deepen relationships. Some people use it to explore second careers or abandoned dreams.
One of Beverley's clients was forced to retire at age 54 but was repeatedly contacted by colleagues who tapped his expertise. Eventually, he accepted the challenge of turning around a struggling manufacturing plant. Now age 66, he still runs the now-thriving plant. Another client outplaced from her job became a travel agent and treks the world testing travel packages sold by her firm.
"These are the people who didn't have the courage to go out and do what they wanted to do when they were younger because it was too risky," Beverley says. "Now they can live their dream."
Make the shift
Working through emotions can help early retirees enjoy their opportunities. Ann was a school administrator who hoped to work until age 65. Health issues forced her to retire at age 57.
"There's a sense of purpose [while teaching] that you're doing it for the kids and you're doing it for the future, and I lost that when I retired," Ann says.
Medical care led to improved health, and Ann began walking five miles a day with a friend who was also struggling to decide what came next in her life.
Figure out how to exchange what you have for what you need. "My friend had lost her husband and I had lost who I was," Ann says. "We found it along the way at about mile 700."
Early retirement meant that Ann and her husband, who had already opted for early retirement, had fewer years to save. Ann's pension replaces about 30% of her preretirement income. Fortunately, the couple was debt-free and their retirement packages included health insurance until age 65.
Four years after Ann's retirement, the couple still lives on one pension and saves the other, although they occasionally tap it for travel or home improvements. They plan to build their nest egg for as long as possible.
"The longer you can go without dipping into savings, the greater the chance that you'll be all right in the long run," Ann says.
Ann and her husband recently moved to a smaller home that suits their retirement lifestyle. She is enjoying time with her husband and working her way through a long list of activities she always wanted to try but lacked the time to tackle.
"We're having a great time, but it took awhile to get there," Ann says.
Published December 22, 2011