Managing an Unplanned Retirement

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When we plan for our retirement, most of us have a retirement age in mind. Perhaps it is 62, 65, 70 or some other age. Perhaps our retirement will be a gradual process over several years. The point is we assume we will retire on our own terms and our own timetable.

But there could be a number of reasons an unplanned early retirement is forced upon you. Two major ones are a job loss and an illness or disability.

What if retirement is forced upon you before you are ready to retire? How would you handle this situation? Here are a few thoughts on how to cope with this situation.

Review Your Financial Situation

The first step is to review your financial situation to see where you are. Two areas to focus on are:

  • Your budget. Where do you spend your money? What expenses are fixed? Are there areas where you can easily cut back? Things like transportation costs, dining out, and clothing and dry cleaning may reduce themselves naturally now that you aren’t working. Non-essential expenses like entertainment can likely also be reduced or eliminated.
  • Your assets. How much have you saved for retirement in accounts like IRAs and your 401(k)? How much cash do you have on hand? What non-retirement assets do you have, such as investments, real estate, collectibles and others?

How can your assets be used to generate cash to offset your loss of income?

  • If you are at least 55 and lose your job, you can take a distribution from your 401(k) account without incurring the penalties that would normally accrue if you are under 59½.
  • If you decide to downsize and sell your home, be sure any proceeds are properly invested to provide additional income. Downsizing can also potentially reduce your living expenses.

If You Lose Your Job

If you lose your job you may be entitled to benefits from your former employer:

  • Severance pay. Depending upon your situation your employer may offer severance pay in the form of a lump-sum or salary continuation for a period of time. This might be based upon a set formula (for example, X number of weeks for each year of service), or depending upon your position in the company, this could be negotiated, or it may be part of your employment contract.

    Your employer may want you to sign an agreement on the way out in order to receive these benefits. You should read this document carefully, as they may be asking you to give up certain rights including the ability to sue for wrongful termination.

  • Unemployment compensation. These programs are state run, and you should file for unemployment as soon as possible. You will also need to understand the rules that apply, including any requirements that you seek employment. Unemployment is funded by employers, and they can contest your receiving it.

  • Other benefits. You will want to be sure you understand how this impacts other employee benefits such as your 401(k), a pension if you have one, and any continuation of medical or other benefits. If you are owed any sort of bonus payment, you will want to understand if this will or will not be paid to you. Additionally, if you have received any sort of stock-based compensation such stock options or restricted stock units, you will want to be sure to understand how your termination impacts these benefits.

  • Health insurance of course is a vital issue if you find yourself forced into an early retirement. COBRA via your employer will be an option in most cases; while this provides continuation of coverage, it is very expensive. If you are married and your spouse is covered by a plan, you may be able to be covered through it. If you are eligible for Medicare, that can be a good option, but any dependents or a spouse who were covered under your health insurance will not be covered by Medicare unless they are eligible. Certainly an individual policy under the Affordable Care Act is a possibility as well.

Job Loss Due to Disability or Illness

In the event of a disability or illness, it is important to check the benefits of any employer-provided or private disability insurance you have. A benefit at 60% of your income is common. Some group disability plans may have limits on the type of compensation that is covered; for example, if you receive a significant portion of your compensation via a bonus, this may or may not be included.

The benefits from company-provided group disability plans are generally taxable to you. The benefits from privately purchased policies are generally not taxable. With either type of policy, you will want to be sure to understand the length of the elimination period, the time until your benefits commence.

If you become disabled, you can apply for Social Security disability benefits. This is an arduous process and benefits can be difficult to qualify for. If you go this route, it might be wise to consider finding a professional with expertise in this process.

Your Company Retirement Plans

Regardless of the reason behind your job loss, you will want to take stock of any retirement plans you have with your former employer such as a 401(k), a pension or other types of plans.

If you are 55 or over in the year you separate from service, you are allowed to take distributions from your 401(k) without incurring the 10% penalty that would normally apply if you are under 59½. Whatever your age, you may be able to borrow from your 401(k).

If you are entitled to a pension, you will want to check with your benefits department to see what benefits you have earned and when they will commence. Depending upon your former employer’s plan, payments can often start as early as age 55, though they might be at a reduced level.

Other Retirement Accounts

Beyond your workplace retirement accounts, be sure you have your arms around any IRA accounts (traditional or Roth) as well as an HSA if you have one.

  • Traditional IRA accounts will normally involve a penalty for withdrawals made prior to age 59½. There is an exception for a disability. Absent this there is a process known as the 72(t) rules, which allows for a series of equal withdrawals penalty free. These rules are absurdly complex and many custodians don’t even understand them, so if this is a route you are considering, it is wise to seek professional guidance. Additionally, you will not be subject to a penalty if you withdraw money to cover health insurance while unemployed.
  • Roth IRA accounts can be withdrawn tax free as long as you are 59½ and meet the “five-year rule,” which means your first Roth deposit must have been made at least five years ago.

  • HSA accounts can be used to cover the cost of a host of qualified medical expenses and can be tapped to cover the cost of COBRA if you are unemployed.

Pulling It All Together

If you find yourself approaching retirement age and out of a job for whatever reason, you will need to determine how to proceed going forward.

  • If you are willing and able, perhaps another job or self-employment is the way to go.
  • In the event of an illness or disability, be sure to look at all of your options to see what is going to put you in the best financial position going forward.
  • Perhaps you will find you are in a position to just go ahead and retire, and this unplanned early retirement was the “push” you needed to do it.

Roger Wohlner

Roger Wohlner is an experienced financial advisor, finance blogger and freelance writer based in Arlington Heights, Ill. His expertise includes providing financial planning and investment advice to individual clients, 401(k) plan sponsors, foundations and endowments. Roger contributes to his own popular finance blog, The Chicago Financial Planner, where he writes about issues concerning financial planning, investments and retirement plans. His work has been featured on Investopedia, Go Banking Rates, US News & World Report, Yahoo! Finance, Equifax Finance Blog and other publications. You can follow Roger on: Twitter - LinkedIn

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