How to cope with an unplanned early retirement

firedJust under half of all workers retire earlier than they expected – and not by choice – according to research by LIMRA, the insurance industry research firm. The most commonly cited reasons included health problems, job loss or burnout and negative work conditions. The LIMRA numbers confirm annual surveys by the Employee Benefit Research Institute, which consistently find that workers don’t have as much control over their retirement dates as they expect.

If you’re facing an unplanned early retirement, it’s time to reassess your financial plan. Here’s a checklist of items to consider.

Assessing the risks

The major risk of unplanned early retirement is having to stretch savings over more years of retirement. There are also fewer years of saving at the high levels just before retirement. Couple that with possible lower-than-expected market returns, asset allocation problems and uncertainty about safe withdrawal and spending rates, and the risks to the plan become all too apparent.

“It can be much more expensive to do than you might think,” says Dirk Cotton, founder of JDC Planning and a blogger on retirement research. Cotton recently won the 2015 RIIA Practitioner Thought Leadership Award for a paper on sequence of returns—just one of the risks that impact early retirement.

Of course, sufficient wealth can reduce risk, but Cotton thinks the risks can be great even with wealth as high as $5 million. For these clients, the best advice may be to get back to work, even if that means working in a part-time or consulting capacity.

Consider this analysis developed by Cotton. The numbers look at a hypothetical individual retiring at age 55, 60, 65 or 70. It considers the cost of retirement to age 95, and the impact on their portfolio and Social Security income. Finally, Cotton shows what the retiree can spend annually to sustain a 95th-percentile chance of sustainability to age 95. Covering short-term needs

Living expenses

Meeting immediate living expenses may be a concern, especially if there isn’t a spouse who is still working.

Go first to your most liquid assets, and avoid tax-deferred 401(k) or IRAs, which generate taxes, early withdrawal penalties or borrowing costs. A second choice would be longer-term taxable assets or a Roth IRA.

401(k) and IRA withdrawals

Traditional IRAs and 401(k)s can be tapped if no other cash options are available, but keep these two factors in mind:

– Income tax. Withdrawals generate an income tax liability, which might be acceptable if overall household income falls into a lower tax bracket due to retirement.

– Penalties. A 10 percent early-withdrawal penalty generally applies if you are  younger than age 59 ½ – although there are a couple exceptions. If you are at least 55 years old and retires, quit or get fired, you can withdraw funds from the 401(k) plan of that employer without penalty under the 72(t) section of the IRS code. This applies to people who leave jobs any time during or after the year that they turn 55. If you have a 401(k) at other former employers, those funds must wait to be tapped until age 59 ½.


Social Security

Early retirement is a key reason many Americans file early for Social Security – 38 percent of men, and 43 percent of women, filed for benefits at age 62 in 2012, according to the Social Security Administration. Although it’s a tempting source of cash, drawing on nest eggs to meet living expenses while pushing back Social Security claiming is a good strategy for many. This is especially true for married couples, who can take advantage of Social Security’s valuable spousal and survivor benefit rules. Click for more . . .

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