By Rodney Brooks, USA TODAY 7:44 p.m. EDT September 24, 2014
Unexpected retirement can be a lot easier if you plan for the unexpected, financial advisers say.
That retirement you’re looking forward to in five years: Be prepared for it sooner than you expect.
Numerous surveys have shown that people think that they are going to retire later than it happens. The two big reasons: health issues and losing your job.
According to the Employee Benefit Research Institute (EBRI), 47% of American retirees in a 2013 survey retired before they planned, mostly because of health or disability.
Unplanned or unexpected early retirement can create havoc with your retirement plans. Some who had to retire early weren’t quite ready financially: Those five or 10 additional years of saving for retirement were no longer possible. Some may have had to take Social Security earlier than expected. And, as we all know, the earlier you take Social Security, the lower your monthly check.
“I have several clients and families who have gone through this,” says Greg Sullivan, with Sullivan, Bruyette, Speros & Blayney In McLean, Va. “What we are always doing is trying to keep our clients prepared for the unexpected.”
Top retirement financial concern: Health care bills
Others are not prepared psychologically.
“Don’t leave your retirement to hopium,” says Kimberly Foss, founder and president of Empyrion Wealth Management in Roseville, Calif., and author of Wealthy by Design. “Hopium is a foolish hope. It allows people to ignore sometimes unexpected realities, such as unemployment. It keeps people from making a proper plan. If they do ignore it, it leads to financial ruin.”
Some advice on how to be ready in case unexpected early retirement happens to you:
• Do an assessment. Sullivan says you should look at cash flow, balance sheet, insurance and estate plans to get an idea of where you are today and the impact of earlier-than-expected retirement.
• Plan for the unexpected. “If you pre-rehearse those types of contingencies, you are far more likely to make good decisions in an emotional moment,” says Joe Sicchitano, head of wealth planning for SunTrust Bank. “Faced with unexpected retirement, your life is in turmoil. If you thought about it, you can make good decisions.”
It’s not that different from helping children who are afraid of monsters in the closet, Sicchitano says. “The best solution is turn the light on, and see how big he is, how scary he is.”
When you know your fears, you can react to them and plan for them, Sicchitano says. “Start with the question, ‘What are you afraid of?’ That can take a number of different turns. I’m afraid of early retirement. I’m afraid of if inflation gets unwieldy, or an unexpected health concern. What if the market tanks when I retire? We can give any client the ability to toggle these scenarios and see how that scenario affects them personally.”
• Build an emergency fund. “You want to make sure you’ve built an adequate emergency fund,” says Marc Freedman, president CEO of Freedman Financial in Peabody, Mass., and author of the book Retiring for the Genius. “Six to 12 months of your living expenses,” he says. “If you are 55 and faced with retiring soon, you should be able to do that.”
• Consider what you want in retirement. Once people get into their 50s, they need to look at how early they can retire, based on what they want, says Joe Franklin, president of Franklin Wealth Management in Hixson, Tenn. “Determine at what age you are independent enough to say, ‘I can keep working if I enjoy it or leave if I don’t like it.'”
• Reduce debt. “The more you can lower your committed expenses, the more flexibility you have,” says Sicchitano.
• Maximize contributions to your 401(k) and minimize fees. Jerry Schlichter, partner in the St. Louis law firm of Schlichter, Bogard & Denton, says the more attention you have paid to your retirement plan, the better you position yourself for an unexpected retirement. “You want to avoid paying fees that will deplete those assets. The Department of Labor has said a 1% difference in fees over a work life expectancy of 25 years will make a 28% difference in the retirement assets you have. Watch your fees, and make sure they are appropriate. Your company has a duty to make sure you are paying reasonable fees.You should look at what those fees are.”
If and when that unexpected and unwanted retirement does happen, here are eight tips on what to do.
1. Prepare for a range of emotions, says Janet Taylor, a New York City psychiatrist and consultant with AARP’s Life Reimagined. “Feel them and process them, but avoid feeling compelled to act on your feeling immediately,” she says.
“Relax,” says Freedman. “Don’t panic. What you may not be able to do tomorrow, may be an opportunity to do something different down the road.”
2. Examine your budget. “Make sure you are comfortable with how much it costs to support your living expenses,” says Freedman. “Many people don’t know what they spend. Grab your bank statements. Look at the total withdrawal number, add up six months of total withdrawals, multiply by two (giving you a year) and divide by 12.”
When you are faced with a surprise entry into retirement, you have to identify your fixed expenses and your discretionary expenses, Freedman says.
3. Set up a time to talk to human resources, if possible. “Assess your resources and sources of support,” says Taylor. “Lean on them.You are not alone.”
4. Look at your current lifestyle. “Look at your current living environment and say, ‘Can I support this lifestyle?'” says Freedman. You might have to downsize a bit. “Maybe it’s stopping the support you are providing to your children and grandchildren,” Freedman says. “There are a lot of things you can consider.”
It may not be easy, says Sullivan. “We can get you to be financially independent, but you have to make some major changes. Some people will go into denial and keep living as they were and not making changes, because it is an emotional issue. You know it will be a train wreck if they keep going that way. Counseling them on the emotional side is just as important as the financial side.”
5. Do not raid your 401(k). “It still is best to conserve assets in your 401(k) plan if at all possible because they are tax deferred, and you may pay penalties,” says Schlichter. “It should be the last resort for an employee unexpectedly laid off.”
6. Consider an encore career. “Maybe you look at unexpected retirement as a gift — as a chance for something you always wanted to do,” says Sicchitano. “Retrain and enter a new chapter. Our first question is how retired are you going to be?”
7. If you are retiring for health reasons and are unable to work, visit the Social Security Administration. “You can apply for disability benefits,” says Freedman. “It’s the main reason Social Security was built. It was really a widow’s, orphan’s and disabled person’s benefit. If you can’t work for health reasons, you can apply for disability benefits and collect at whatever age you might be. If you have young children you can collect checks for them, too.”
8. “Pay attention to your physical health,” says Taylor. “Changes can be stressful. Monitor your sleep and strive for healthy diets and regular exercise to combat stress.”