How to Deal With Involuntary Retirement without Losing Your Shirt

Most of us work and save for retirement up until the day we are ready to walk away from work— whether that’s at age 62 when you become eligible to receive Social Security benefits, after the 25th year when you earn a pension bonus or anytime earlier or later.

Unfortunately not everybody has a choice when it comes time to retire. According to Employee Benefit Research Institute, nearly half (47 percent) of retirees left the workforce earlier than they planned, often due to family responsibility, illness or injury which prevents them from continuing in their careers. And sometimes people are forced into retirement due to layoffs, buyouts, downsizings and business closures. These involuntary retirement situations can result in a big financial burdens. Whether you retire because you want to or because you have to, it’s possible to make your retirement years happy and healthy. With careful planning and flexibility you can adjust your finances to get back on track.

Common Issues with Involuntary Retirement

Being forced into retirement has an impact on your financial future. For every year you are forced into retirement early, it is a year that you are not funding your 401(k) or IRA. Worse yet, if you can’t

find another job, you may end up drawing from your savings over a longer period of years and signing up for Social Security early (which translates into smaller payments).

You may need to reduce your expectations about the lifestyle you lead and transition to a more restricted retirement budget. And you will want to sit down with a trusted financial advisor to account for any shortfalls in your savings plans.

Here are 3 common issues which a financial advisor can help pre-plan for to avoid a financial shortfall in the event of an involuntary retirement:

  • Personal Illness and Injuries – Unexpected health issues and disabilities are the most common reason workers retire early. Retiring early while simultaneously encountering mounting medical bills can quickly drain your retirement savings. Health insurance and a plan for long-term care are essential to avoid spending your savings too quickly.
  • Family Obligations – Some people (usually women) end up having to take early retirement so they can help care for a spouse, parent or other family member. This is another reason women in the workforce need to have thorough retirement plans and contingency plans for extra savings in case you have to leave work.
  • Death of a Family Member – The death of a spouse can complicate your retirement finances. Aside from additional expenses and the obvious emotional stress, pension and Social Security payments can be reduced or cut, greatly impacting the family budget. It’s important for couples to make financial preparations for retirement that will last throughout both of your lifetimes.

5 Steps to Surviving an Involuntary Retirement and Savings Shortfall

If you did not have extra savings and forced retirement contingency plans, there are steps you can take to stem the financial hemorrhaging and make up any savings shortfalls you may be facing.

  1. Make an Honest Evaluation of Your Current Financial Situation

Evaluate your current savings and income sources to determine if they will provide enough income to pay your monthly expenses. If you do not have enough to cover your bills, then you have to find a way to reduce your living expenses, extend your career or generate income from alternative sources.

2. Revise Your Retirement Strategy

Risk tolerance is a major factor in investment strategies and if you’re forced into retirement you may not be able to handle major swing in your portfolio performance. You need a diversified portfolio that provides enough exposure to the stock market that you will be able to keep up with inflation over the long haul, but not so much that you will find yourself panicking during the next stock market downtown. Speak with your broker or financial advisor to rebalance your portfolio to reflect current needs for secure savings. An adequate emergency fund will be helpful if you are forced into early retirement or experience a costly health issue once you’re on a limited income.

Don’t touch your 401K early! This cuts your long-term earning potential and comes with costly penalties (fees and extra taxes). If you must, roll them over into an IRA. Also, keep an eye on taxes as you begin to spend down your retirement assets. Try to spend from your taxable accounts first.

  • Adjust Your Spending & Retirement Lifestyle Expectations

The single biggest reason people get into trouble when they hit an unexpected financial bump is that they continue to live exactly as they did before without adjusting for the loss of income. Even if you think you can afford daily luxuries such as gym fees and lattes, you should immediately cut out all non-vital expenses until you’ve made adjustments to your savings plans with your trusted advisor. Too often, those forced into retirement make the mistake of burning through cash and savings in the belief they will be back to work much sooner than reality allows.

If you were originally planning to spend 4 or 5 percent of your savings each year after retiring at age 65 or 70, you might have to adjust that percentage downward to 2 or 3 percent – this will help your retirement savings last longer.

4. Sign up for Social Security if you’re Eligible

If you are at least age 62 when forced into retirement, you have the option to begin claiming Social Security payments. It is ideal to delay taking Social Security. If you do decide to take payments be away that your total payout will be reduced if you claim before age 70. If you do find a job after claiming benefits, you may be able to suspend future Social Security payments, then claim a higher amount once you choose to retire.

  • Consider Other Income Sources – Part-Time Work, Contracting, Hobbies, etc.

It can often be hard for older workers to find a new job or change careers, but you may want to consider picking up temporary work just to keep your cash flow consistent and protect your family budget. You may have to accept lower-status positions, less pay or inconsistent contract work, however, even a part-time job can significantly improve your retirement finances. There is also the option to find your passion, start a business, sell your jewelry, etc., the goal here is not a career but to earn enough to get by and keep your mind/body active.

Be Prepared – Make Plans and Adjustments to Survive Forced Retirement

Did you want to retire early? Probably not. Don’t wait to be pushed into an early retirement before starting to plan. You have an opportunity to adjust your savings and maintain your lifestyle into the long-term. As long as you avoid tapping into your 401k, living the same lifestyle reflecting your previous income and staying out of the workforce instead of taking something that generates cash in the meantime – you should be able to survive a financial shortfall initiated by an involuntary retirement event.

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