Planning and saving for retirement is a serious financial issue for most of us. We spend years building our nest egg, with the goal of stepping into retirement financially and psychologically prepared. However, sometimes retirement arrives earlier than planned on.
A recent survey found that among people who retired early (before age 65), 43 percent retired earlier than they intended. For a few it was because they come into sudden money such as lottery winnings or an inheritance. But many in the survey cited “negative” reasons for retiring early including health, disability, being laid off or having to take care of ill family members. University of California researchers found that half of Californians retiring before age 50 cited health reasons as their reason for the early retirement.
Whatever the reason, w hen an unplanned early retirement occurs, you’ll need to plan carefully to make adjustments. Not only your lifestyle may need adjusting, but so will your attitude.
First, don’t make any immediate, rash financial decisions. Making a wrong decision now can cause financial problems the rest of your life. As an example, if you’re retiring early because you’ve suddenly come into money, don’t make major investment decisions within the first 60 to 90 days. Put the money into a bank or mutual fund money market, and leave it alone until you have time to think about what it can really provide for you, even if it takes you six months.
If you’ve suddenly left your job because of a layoff or because you have to take care of a sick family member, you may want to immediately do a little financial belt tightening. Otherwise, don’t make other immediate major financial decisions.
Second, revise your financial plan, or create one. This act will be the most important thing you can do to give yourself control of your new retirement. This is especially critical if you’ve been forced to retire for “negative” reasons. You’ll want to review the entire gamut: income and outflow, insurance, estate planning, investments, possible government assistance and so on.
Maintaining control of expenses is a critical component for any retiree, since income tends to be more limited. Controlling expenses is especially critical for unplanned retirements. Early retirees typically face major expenses that would often be gone in normal retirement: mortgage payments such as a child's college expenses. Early retirement to care for an ill relative will probably result in money out-of-pocket expenses for that relative. A spending plan becomes absolutely vital to keeping expenses within line of income.
Retiring early means more years of retirement and the costs that go with retirement. This is a double whammy because you not only have more years to pay for but you end up with fewer working years to fund the retirement. Your later work years are usually when you earn your most income and can best sock away for retirement. Traditional pension plans also are skewed toward late-career earnings.
Investments present another area of challenge. You have a longer retirement to fund than originally planned is the biggest challenge. More aggressive investing can help make up some of that shortfall.If you’ve retired earlier than planned for negative reasons such as a loss of job or health, you’re going to need immediate cash flow from your investments to help cover expenses, and that means investing less aggressively and going with cash producing investments. Review with an investment advisor how best to get the kind of investment you need. Aadjusting your portfolio so that part of it generates more income while the other part grows more aggressively through non-income producing investments may be a solution.
Retiring early means more years until you qualify for Medicare. It is vital that you are covered by a major medical health insurance policy, even if finances are tight.
Do not fail to address the psychological implications of early retirement. Even for planned retirements, leaving the workforce can be a difficult emotional adjustment. It’s tougher with an unplanned early retirement because you haven’t had time to mentally prepare for it. When you retire, take a breath and sit down to think through your new situation. Then start planning for your retirement years.
Roger Sorensen
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