{"id":8499,"date":"2020-10-10T07:45:45","date_gmt":"2020-10-10T11:45:45","guid":{"rendered":"https:\/\/kerryhannon.com\/?p=8499"},"modified":"2020-10-10T07:49:15","modified_gmt":"2020-10-10T11:49:15","slug":"what-to-know-about-retiring-earlier-than-planned","status":"publish","type":"post","link":"https:\/\/kerryhannon.com\/?p=8499","title":{"rendered":"What to Know About Retiring Earlier Than Planned"},"content":{"rendered":"
\"\"<\/a>The coronavirus pandemic is causing many older workers who\u2019ve lost jobs or been offered early retirement severance packages to decide to pack it in.<\/span><\/header>\n
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But taking\u00a0early retirement<\/a>\u00a0can throw a monkey wrench into your future financial security. That\u2019s why it\u2019s vital to be cautious before doing it. I\u2019ve talked to several sharp financial advisers for their tips on how best to prepare to retire earlier than you planned; you\u2019ll see their suggestions below.<\/div>\n
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\u201cThe numbers suggest that while many older workers displaced by COVID-19 job loss are still seeking work, a large number have dropped out of the labor market entirely,\u201d Jennifer Schramm, a senior strategic policy adviser at the AARP Public Policy Institute wrote in her blog: \u201cDevastating Job Losses May Be Pushing Older Workers Into Retirement.<\/a>\u201d As a result, Schramm said, \u201cjob losses associated with the pandemic may be leading to a substantial rise in earlier-than-planned retirement.\u201d<\/p>\n

It can be enticing when your employer dangles an early-retirement package compelling enough to grab it and not look back.<\/p><\/blockquote>\n

Frankly, as someone who writes about work and money for people over 50, I\u2019m worried that\u00a0frustration with the job search<\/a>\u00a0or eagerness to grab early-out offers are triggering people to retire early, with potential financial reverberations for the rest of their lives.<\/p>\n

The Risk of Claiming Social Security Early<\/h3>\n

Take Social Security \u2014 or rather, maybe don\u2019t.<\/p>\n

\"Michelle
Michelle Connell, Portia Capital Management<\/figcaption><\/figure>\n

Due to the heightened unemployment of the Great Recession, \u201cthe take-up of Social Security at age 62 jumped from 42.2% in 2007 to 46.9% in 2009,\u201d Alicia H. Munnell, director of the Center for Retirement Research at Boston College, wrote on MarketWatch. And, she added, \u201cI would expect this pattern to repeat itself in the wake of COVID-19.\u201d<\/p>\n

Here\u2019s why that\u2019s a concern: Starting to\u00a0claim Social Security at 62<\/a>\u00a0because you aren\u2019t working will then lock you into a level of much smaller benefits than if you\u2019d waited until later.\u00a0 \u201cBenefits claimed at 70 are 77% higher than those claimed at 62,\u201d Munnell wrote.<\/p>\n

\u201cIf you qualify for the maximum amount of Social Security and take your benefits at the youngest allowed age, you will receive $2,252 each month,\u201d says Michelle Connell, a Chartered Financial Analyst and owner of Portia Capital Management in Dallas. \u201cIf you wait until you are 70, you will receive $3,980 a month.\u201d<\/p>\n

Those Enticing Early Retirement Offers<\/h3>\n

Undoubtedly, it can be enticing when your employer dangles an early-retirement package compelling enough to grab it and not look back.<\/p>\n

A growing number of companies from airlines to media firms have been making these offers due to the pandemic. According to CNBC, nearly 4,000 Southwest Airlines workers and 2,235 Delta pilots signed up for buyouts. Delta offered partial pay for up to three years plus extended health insurance coverage.<\/p>\n

A spokesman for the Air Line Pilots Association told CNBC: \u201cThe voluntary early-out program participation exceeded our expectations.\u201d<\/p>\n

Such offers might not come around again anytime soon and there is no guarantee your job will be safe.<\/p>\n

Don\u2019t expect your company to follow it with another severance package for future rounds of layoffs, notes Connell.<\/p>\n

It\u2019s logical to me that older workers, especially those in spitting distance of age 65, would decide to bid employment adieu. Medicare kicks in at 65 and\u00a0full\u00a0<\/em>Social Security benefit eligibility starts at 66 or 67.<\/p>\n

Whatever the impetus, the decision to retire is often emotional and fraught with myriad calculations. It\u2019s generally not a solo decision if you have a spouse or partner or minor children.<\/p>\n

Money Advice for the Early Retirement Decision<\/h3>\n

Here\u2019s how to help shape a financial framework if you\u2019re contemplating early retirement:<\/p>\n

Prepare a budget<\/strong>. Retiring early \u201ccan be a difficult decision, since there are so many unknowns to consider,\u201d says Charles Adi, a Certified Financial Planner at the advisory firm Blueprint 360 in Houston. \u201cI encourage my clients to take some time and evaluate the three critical retirement planning areas: income, expenses and insurance.\u201d<\/p>\n

\"Charles
Charles Adi, Blueprint 360<\/figcaption><\/figure>\n

First, determine your monthly income and spending needs in retirement.<\/p>\n

\u201cBe careful not to underestimate your discretionary budget for travel, shopping, eating out and spoiling the grandkids,\u201d Adi says. \u201cYou will be surprised how quickly small purchases add up.\u201d<\/p>\n

Ask yourself this key question: Will there be areas you can cut back expenditures, say, by moving to a smaller home or town where the cost of living is cheaper?<\/p>\n

Websites like\u00a0Mint.com\u00a0<\/a>and\u00a0YouNeedABudget.com<\/a>\u00a0offer free software to track spending and set up budgets.<\/p>\n

If you\u2019re offered an early retirement package, really scrutinize it.\u00a0<\/strong>Buyouts are often complicated and not cookie-cutter. Most are negotiable to some extent, too.<\/p>\n

You have to truly understand what the deal is that\u2019s being offered, says Dennis Notchick, a Certified Financial Planner for Stratos Wealth Advisors in San Diego. That goes beyond how much money you\u2019ll receive, which is often related to your tenure with your employer.<\/p>\n

\u201cIs it a lump sum? Is there an\u00a0annuity<\/a>\u00a0option, lifetime income payments?\u201d Notchick says. A lump-sum buyout can balloon your income for the year which can result in a significant tax bill. If you can take the payments in stages, that could lower your IRS bill.<\/p>\n

If you are married, you\u2019ll want to pay special attention to the payout rules.<\/p>\n

\u201cSometimes a person will take a lifetime income payment, but if they die, their spouse gets nothing. Sometimes a survivorship benefit of fifty percent or two-thirds is an option,\u201d says Notchick.<\/p>\n

To immunize yourself against future tax rate hikes due to federal deficit spending, Notchick says, you may want to use some of your early retirement money to open a tax-sheltered Roth IRA.<\/p>\n

\u201cEvaluate your annual expenses and multiply this by 25.\u201d<\/p><\/blockquote>\n

Be sure to review any medical coverage, too. A typical offer includes one year of health coverage.<\/p>\n

Access to an employer health plan might be something you can negotiate for an extended period of coverage.<\/p>\n

When job-based plan coverage ends (and you\u2019re not yet eligible for Medicare), you can usually continue enrollment for up to 18 months \u2014 sometimes longer\u00a0\u2014 under a federal law known as\u00a0COBRA<\/a>, which stands for the Consolidated Omnibus Budget Reconciliation Act. It requires firms with at least 20 employees to offer this option.<\/p>\n

Normally, you have up to 60 days to elect COBRA and another 45 days to pay the first premium (covering the period dating back to your coverage loss). But if you\u2019ve been laid off or furloughed due to the pandemic, a\u00a0recent federal rule gives you more time to decide about COBRA<\/a>.<\/p>\n

The date to elect COBRA now begins March 1 (the end of the COVID-19 \u201coutbreak period\u201d) and will end 60 days after whenever the government ultimately declares the COVID-19 emergency over. So, according to NPR, if you were laid off in April and the COVID-19 emergency ends Aug. 31, you\u2019d have 60 days beginning Aug. 31 \u2014 the end of October \u2014 and then the regular 60-day COBRA election period after that.<\/p>\n

\"Dennis
Dennis Notchick, Stratos Wealth Advisors<\/figcaption><\/figure>\n

So, people laid off because of the coronavirus outbreak have at least four months, maybe more, to decide whether they want to elect COBRA.<\/p>\n

The drawback: COBRA premiums are steep. Figure on something like $600 a month per person or more.<\/p>\n

\u201cFinally,\u201d Notchick says, \u201cis long term care of concern? Are you currently covered by a long-term care policy at work?\u00a0 If so, can you keep it when you retire? And is it worth keeping?\u201d<\/p>\n

Determine your retirement income sources.<\/strong>\u00a0Carefully review your anticipated income (Social Security benefits, pensions, distributions from personal investments and savings) and expenses (weekly, monthly and yearly budgets).<\/p>\n

Many major mutual fund companies have retirement calculators on their sites that can help you with this exercise.<\/p>\n

\u201cFocus first on guaranteed sources, such as Social Security and pensions. Then calculate your monthly cash needs from investments,\u201d Adi says. \u201cIf you are fortunate to have a pension, evaluate your payout options and determine if your pension payment adjusts for inflation annually.\u201d<\/p>\n

The Social Security Administration website can let you get an\u00a0estimate of your future Social Security benefits<\/a>\u00a0and a record of your lifetime earnings history.<\/p>\n

If you\u2019re married, you\u2019ll need to determine when it\u2019s best for each of you to start claiming Social Security. \u201cDo you need to trigger both you and your spouse\u2019s Social Security policies when you retire?\u201d Notchick asks. \u201cCan you take one or both later and let it increase?\u201d<\/p>\n

The AARP website has a useful\u00a0Social Security benefits calculator<\/a>.<\/p>\n

Plan your withdrawals from savings and investments<\/strong>. A conservative annual drawdown of retirement savings may be to take 3% the first year, and to adjust for inflation after that.<\/p>\n

If you\u2019ve been fortunate enough to have saved $1 million, for example, plan to withdraw $30,000 in the first year and to increase that amount by the rate of inflation in the second year and beyond.<\/p>\n

Some financial advisers stick with the 4% rule for retirement withdrawals.<\/p>\n

\u201cEvaluate your annual expenses and multiply this by 25,\u201d Connell says. \u201cThis will give you the amount of money you must have order to qualify for standard 4% withdrawal rate and not run out of money.\u201d<\/p>\n

If you\u2019re not taking an early retirement offer with health coverage and are thinking of retiring before 65, be sure to take health insurance into account<\/strong>. You won\u2019t yet be eligible for Medicare, so health insurance will be a huge consideration.<\/p>\n

If you have a spouse who is still working, you may be able to tap into health coverage via his or her employer. Otherwise, look into Affordable Care Act options through\u00a0healthcare.gov<\/a>\u00a0or your state\u2019s marketplace.<\/p>\n

At 59, I currently shell out around $800 a month for a health insurance plan that has a high annual deductible: $7,500.<\/p>\n

Talk to a financial adviser.<\/strong>\u00a0An expert can help you work through your early retirement puzzle. I recommend working with a fee-only financial adviser, rather than one who charges commissions. And look for one who is a fiduciary \u2014 which means this pro puts your interests first.<\/p>\n

Some databases to search for a certified financial planner: the nonprofit Certified Financial Planner Board of Standards, the National Association of Personal Financial Advisors, the Financial Planning Association and Wealthramp.com.<\/p>\n

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By\u00a0Kerry Hannon<\/a><\/span><\/p>\n

Kerry Hannon is the author of\u00a0Great Pajama Jobs<\/em>:\u00a0Your Complete Guide to Working From Home<\/em><\/a>. She has covered personal finance, retirement and careers for The New York Times, Forbes, Money, U.S. News & World Report and USA Today, among others. She is the author of more than a dozen books including\u00a0Never Too Old to Get Rich: The Entrepreneur’s Guide to Starting a Business Mid-Life<\/em><\/a>,\u00a0Money Confidence: Really Smart Financial Moves for Newly Single Women<\/em><\/a>\u00a0and\u00a0What’s Next? Finding Your Passion and Your Dream Job in Your Forties, Fifties and Beyond<\/em><\/a>. Her website is\u00a0kerryhannon.com<\/a>. Follow her on Twitter\u00a0@kerryhannon<\/a>.<\/div>\n<\/div>\n<\/div>\n

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