How to cope with an unplanned early retirement


Health insurance

Medicare eligibility begins at age 65, but the Affordable Care Act (ACA) creates valuable new options for  younger retirees. First, insurers can’t turn down enrollees due to preexisting conditions. Second, the overall cost of insurance will be held down for many by cost-sharing subsidies and advance-able, refundable tax credits on premiums. This year the subsidies are available for individuals with annual income between $11,490 and $45,960, and from $23,550 to $94,320 for a family of four. The definition of income is modified adjusted gross income (MAGI), which includes wages, salary, foreign income, interest, dividends and Social Security benefits. The subsidies create incentives for households to carefully manage income to stay within premium assistance brackets. More on shopping the exchanges can be found here.

If you’re approaching Medicare age, it’s important to know how to time your filing, and give thought to key decisions, such as whether you’ll want traditional fee-for-service Medicare or a managed care Advantage plan. Also take time to understand your options shopping for prescription drug plans.

Pensions

If you are fortunate enough to have a defined benefit (DB) pension, the natural inclination may be to file for benefits immediately. Not all DB plans allow early retirees to file for a benefit before full retirement age, but if yours does, check on how taking a pension early will affect payouts for the beneficiary and for a surviving spouse.

The Pension Rights Center also advises early retirees to check the plan’s rules in the event you decide to return to work after benefits start. Some plans require that benefits be suspended under certain circumstances; failure to navigate those rules properly could result in recoupment claims down the line.

A growing number of plan sponsors now offer lump sum distributions from DB plans – another possible temptation for an early retiree. Lump sums can make sense if you’re in poor health, or if you have other reliable sources of regular income – for example, a spouse with a defined benefit pension — and might benefit from the flexibility of access to the lump sum. But as a rule of thumb, lifetime income streams will be more beneficial. The Pension Rights Center offers this lump sum fact sheet.

Re-think spending plans

One bit of good news: you may not need as much money for retirement as you think. Recent Morningstar research finds that the typical rule-of-thumb on pre-retirement income replacement is off the mark, and that actual needed replacement rates vary from under 54 percent to over 87 percent. A key finding: spending actually falls over the course of retirement, especially for wealthier households, which have more discretionary pre-retirement spending, and thus have more flexibility in retirement to cut back if funds aren’t available. This is especially true as people reach advanced ages, when their interest and ability to spend on travel, entertainment and clothes declines.

Do a careful projection of spending needs, starting with a blank sheet of paper, and look for ways to re-examine your assumptions. A book I often recommend that can help is Retire on Less Than You Think by Fred Brock, a former retirement columnist for The New York Times.

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