Four Tips if an Early Retirement Is Forced On You

27 December 2011

Back in the late 1990s, many people planned on retiring in their mid-50s and living a long retirement of golf and idleness. Then the markets corrected in 2000, and again in 2008, and now I don't meet many people who talk about retiring that early. Yet people do still retire early. It seems, however, that they are often forced to retire because of mass downsizings by companies. So if this happens to you, or someone you know, consider these ideas for your next step:

1. Create a spending plan: Another way of saying this is, get a budget. Write down what you spent over the last 12 months and assess how much of it you can cut out in the near term. You may or may not get another job, so now is the time to go through your spending with a fine-tooth comb. If you do get another job, you can always go back to enjoying discretionary expenses.


2. Look for work: The biggest issue I see with people being forced out of work in their 50s is that they let their pride get in the way of getting another job. I remember talking to a recruiter a decade ago about people taking lower-paying work when unemployed and how that might hamper them getting back to the level they were at previously. In today's job market, many people still believe they shouldn't take a lower-paying position, even when they know they will never go back to work in their previous field. Lowering expectations and taking a job as a barista might be just the ticket to supplementing income and making the transition into retirement not only  workable, but more fun (since you'll be able to stay engaged with people). At a coffee shop I frequent there's a very happy ex-police officer working behind the counter, which attests to this theory.


3. Take stock of your assets: Most think they do not have enough to retire, and panic. The rule to keep in mind is that if you tap retirement accounts [401(k), 403(b), IRA, etc.] prior to age 59½ you will need to pay both taxes and a 10% penalty on the withdrawals. But there are ways that allow you to use assets you have, without the 10% penalty, even prior to 59½ when 401(k)/IRA assets are typically used. 
   1. 401(k): Prior to 59½, and after age 55 (you must leave your job after age 55), you can withdraw from a 401(k) if you no longer work at the company without the 10% penalty.  You must not have other 401(k) accounts open however; this is a good reason to always roll old 401(k) accounts into your most recent employer's 401(k).
   2. IRA: If you only have IRA assets, or if you roll a 401(k) to an IRA (especially if you need the money prior to 55), then you can take separate equal periodic payments (SEPP) from the IRA for five years, or through age 59½, whichever is later, without the 10% penalty. This might not be the optimal way to view your retirement funds, but it could bridge a gap if it is your last resort.
4. Review Social Security: Just because you aren't working prior to 62, do not jump to the conclusion that as soon as you get to 62 you should start taking Social Security. By delaying benefits, you'll be able to increase them approximately 6.5% per year until age 66, and then 8% per year until 70. You might feel like delaying until 70 seems too long, but if you can afford to do so it might provide a lot more cushion during the rest of your retirement; you will get a much higher benefit, and that benefit will compound.

Losing a job can be traumatic but the ripple effects can be minimized if you sit down with a financial planner and/or accountant and think through the many different moving parts. There are ways to make it work, and for some who decide to work part time in this next phase of life, it might even be liberating.  After all, what happens next is your choice.

About Jon T. Meyer, CFP®