What to Do When Early Retirement Hits You By Surprise
About 60% of today’s retirees didn’t plan to retire when they did, and almost half of retirees enter retirement earlier than they’d planned, according to the Employee Benefit Research Institute. But while early retirement can be a goal for many people, a surprise early retirement — one you haven’t financially planned for — can be terrifying. Thankfully, if your golden years arrive earlier than expected, there are things you can do both before and during retirement to minimize the damage and start looking ahead.
While You’re Working:
- Make Sure You’re Saving As Much As You Can: Hope for the best but prepare for the worst. The worst, in this case, is being surprised by early retirement. Are you using a full employer match on your 401(k)? Should you invest more aggressively? What about Health Savings Accounts? If you have an option to contribute to one, it has a triple tax benefit and could really help out with your health insurance bills if you were to lose coverage after an early retirement. Remember that in many cases not tapping into social security until you absolutely have to is a smart move, so make sure you’re maximizing your savings everywhere you can.
- Pay Off Your Debt: This step is so important that, in certain cases, you may even want to prioritize your debt repayment over your 401(k) contributions, explains New York-based financial adviser Benjamin Schmid. For example, if you have short-term, high-interest debt — like credit card debt — you should aim to reduce it while your income is steady. If your income decreases unexpectedly, the last thing you want is debt weighing you down.
After You’re Surprised With Retirement:
- Review Your Benefits: If it’s been a while since you went over all the specifics of your benefits, take a closer look at everything you’re offered. Do you have a severance package? Does your health insurance carry over into unemployment? If so, for how long? If you had to retire early due to an injury, are you eligible for workers’ compensation. Figuring these things out is crucial when it comes to determining what your new monthly income is going to be, especially considering that you may be too young to claim social security or apply for Medicare.
- Be Careful With Your Withdrawals: Early withdrawals from your retirement accounts are a big no-no — if you take money out before you’re 59 and ½ years old, you can face penalties that cause you to lose a portion of your hard-earned savings. You also want to avoid tapping into your savings accounts and emergency savings if you can, but sometimes it’s unavoidable. When it comes to making withdrawals, Schmid suggests asking yourself: ”What am I going to use this money for?” If the money is for an emergency medical bill, a healthcare plan, or a roof over your head, then you’ve got the green light. If, however, you’re using that money for non-necessities, like a new car or vacation, Schmid advises you hold off.
- Re-Budget Accordingly: After you’ve evaluated all of your options, benefits and potential income opportunities, calculate your total monthly income. Then, take a look at all of your monthly expenses. Find out if your current lifestyle is sustainable with your new income and if not — adjust it. “Sometimes it makes sense to move,” says Schmid. If you live in cities like New York and San Francisco, for instance, where real estate prices are astronomical, moving to a nearby suburb could save you a ton in monthly expenses (and you might be able to supplement your nested with equity from the sale of a home). For other ways you can cut back and budget for your new life, you may want to consult with a financial planner, Schmid advises.
Bonus: Follow Your Passions
Many people don’t just retire from something they retire to something, Connecticut-based financial planner David Wilson explains. Hobbies and daily activities that’ll keep you engaged can help make retirement truly fulfilling. Ideally, you can figure out what those might be while you’re still working. And, if needed, your interests could help you land a part-time job that’ll bring in extra income. In other words, try to do what you love, and find out where it may lead you.
Three Keys to a Big Nest Egg
A simple guideline to retiring with money.
Sometimes it feels like there are roughly 200 different “rules to retiring with money” out there. In an effort to keep things simple, here are three guidelines. Follow these tips and there’s a good chance you’ll head into your golden years with a plump retirement nest egg.
Take a Two-Pronged Approach
You shouldn’t wait until you’re debt-free before you start investing. An AARP report found that Baby Boomers have an average of between $6,465 and $8,158 in credit card debt and Gen X has an average of between $8,235 and $9,096. Simultaneously, one of the keys to retiring with money is to invest and do it early. According to Money, if you graduated at 22 years old didn’t start investing until you turned 34, you’d miss out out on about $4,358.26 in market gains. So try to invest and pay down debt simultaneously — even if the amount you’re investing is small. Then keep paying down your debt as quickly as you can. Don’t forsake one for the other.
Spread Out Your Income
One secret to retiring with a solid nest egg is to have a diversified income stream while you’re still working. This could be anything, from a side gig to good investments to property ownership. As you might guess, the more revenue streams you have, the more secure your retirement funds will be. If you lose one stream, you can fund your savings accounts with a different one.
Invest Any Windfalls
If you get a big tax return, an inheritance or a bonus from work, invest it right away. Taking this approach will help boost your savings and makeup for any times when you can’t afford to save as much as you’d like. Resist the urge to spend that big chunk of change. When you’re retired, you’ll be happy you did.
Better Do More
Why it's a good idea to overthink retirement savings.
According to a study from the Associated Press-NORC Center for Public Affairs Research, many retirees are feeling pretty good about their savings. The study found that of current retirees, 38 percent reported feeling “confident” about the amount of post-work savings they’ve stashed away. It’s good to be confident about the state of your retirement savings. It’s better to be vigilant.
But as USA Today reports, a separate study from the World Economic Forum exposes the fault in being confident about retirement savings. The Forum survey that the average retiree will likely outlive their savings by eight to 10 years. That means no matter how confident you are with your savings, it’s probably not going to last.
Whatever amount you have saved for retirement, the key is to keep saving more. While that sounds like a vague direction, there are some factors you can analyze that will help clue you in on exactly how much you need to save. One important piece of information is how much you think you’re going to spend each year during retirement. Another is medical history. It’s hard to predict the future, but if you have a history of a chronic disease in your family, make sure you account for medical costs down the road. You’ll also want to consider how much your Social Security payments will be and how much of your spending in retirement it will cover. Finally, consider life expectancy. There are tools available online to help you get a good estimate on that number. Obviously the longer you think you’ll live, the more savings you need.
Once you have as much info on those factors as possible, use a retirement calculator to get a ballpark figure of how much money you’ll need to retire. Then, just to be on the safe side, save more than that.