Early retirement is far more common than people realize, and its often unplanned. Retiring early may sound like cause for celebration, and it is for some, but for many people, early retirement can strain finances and cause stress.
Few people who retire ahead of schedule do so because they can afford it. According to a recent Transamerica survey, 56% of retirees reported retiring earlier than they had planned. Of those 56%, only 11% did so because they had saved enough money -- the rest citing employment-related reasons like job loss, or family and health-related reasons like an illness or sick family member.
If you're forced to retire early, your retirement savings could be depleted faster than you planned and you could be left without enough money to fund living costs during your final years. Below, I'll discuss potential consequences of an unplanned early retirement and how to avoid these pitfalls, whether your early retirement is planned or unplanned.
The problems with unplanned early retirement
Ideally, you should know approximately how much money you will need for retirement, based on your estimated living expenses, life expectancy, and planned retirement age. Setting aside money each month helps you retire when you finally hit your goal amount. Simple!
But if a major life occurance like a job loss or sudden illness derails your plan, you could be forced to tap into your retirement funds early to make ends meet. This may cause you to deplete your savings much faster than anticipated, and if you retire before age 59 1/2, you will have to pay a 10% early withdrawal penalty on any money you take out of your retirement accounts.
An unplanned retirement may also force you to begin taking Social Security earlier than you anticipated to pay the bills. You become eligible for Social Security at age 62, but you aren't entitled to your full benefit amount until your full retirement age (FRA) -- 66 to 67, depending on when you were born. If your original retirement plan assumed that you waited until your full retirement age to begin claiming Social Security benefits, early retirement can throw a wrench in things.
When you're forced to begin claiming benefits early, you'll have to get by on smaller monthly checks than you had allotted for, if your plan assumed you waited until your FRA. The difference will have to be drawn from your personal savings to get by.
What to do if you're forced to retire earlier than expected
If you're forced into early retirement, your options largely depend on your reason for leaving the workforce.
For example, if you lose your job, you may be able to find a new one or work part-time so that you don't have to drain your retirement savings. If you're concerned about serious injury or illness preventing you from working, it's a good idea to look into long-term disability insurance that would help cover your expenses without dipping into your savings.
You may have to make some lifestyle changes to make your existing retirement plan more realistic, like cutting back on travel, shopping or dining out. Or you could downsize by moving to a smaller house or a more affordable neighborhood. Of course, these two options come with expenses too, so weigh the long-term savings against any up front moving or mortgage costs.
How to avoid an unplanned early retirement
The best thing to do to avoid an unplanned early retirement is to start saving as much as you can for your retirement as early as possible, to take advantage of powerful compounding growth in your retirement accounts.
It's difficult to accurately predict how much money you will need in retirement, so aim for the higher side of your ballpark range to be safe. Add up your estimated living expenses for the first year of your retirement, then figure an additional 3% for inflation for every year after that. Keep in mind, you'll stop paying for certain things in retirement (child care, retirement account contributions, saving for kids' college), while you will probably pay more for things like healthcare. Your income streams will also look much different from your working years.
Once you have your estimated expenses, subtract what you expect to receive in Social Security benefits to figure out how much you need to save on your own. Of course if you're married, you'll need to strategize with your spouse on when you both should start claiming, to maximize your Social Security benefits.
Reevaluate your retirement plan every few years to ensure it's still adequate for your needs and that you're on track. You may have to make adjustments to how much you're contributing if you believe there's a chance that you could be forced to retire ahead of schedule.
An early retirement is a wonderful thing if you've planned for it and can afford it. But if you're forced into it, it can make your golden years anything but relaxing. Prepare yourself by boosting your retirement contributions as much as you can. You may think it will never happen to you, but it's better to be prepared and then not have to use your safety net than the opposite happening. Any money leftover in your nest egg can always be passed down to your heirs or donated to charity.
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