You’ve drawn up a retirement plan, you’re saving each month, and you think you’re on track for your financial goals. But even the best-laid plans can go wrong. If you’re forced to retire sooner than expected, you could struggle to support yourself on a smaller nest egg that now has to last years longer.
It’s more common than you think. 37% of people retire earlier than planned, according to the Center for Retirement Research (CRR) at Boston College. Below, I explain common reasons people are forced to retire early and what you can do to prevent an unplanned retirement from threatening your financial security.
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Common causes of unplanned retirement
The CRR study cites three main reasons people are forced to retire early. The first is poor health. While you may plan to work until age 65 or 70, a crippling illness or injury could prevent that. You’d lose months or years of income and be forced to tap your retirement accounts ahead of schedule. You may also have large medical expenses that drain your savings faster than anticipated.
The second cause is employment changes. If you’re laid off or your company goes under, you’ll have to decide whether to seek new employment or retire early. Those who cannot find a new job may not have a choice.
The third cause is familial shocks. A divorce, poor spousal health, or a dependent parent moving in could strain your finances, preventing you from saving as much as you’d like for retirement or draining your retirement savings too quickly.
How to deal with an unplanned retirement
The first step is to decide whether you truly need to retire now. If you’re unable to work because of poor health, you may not have a choice. But if you’ve lost a job, you can try to find a new one so you can continue working until your planned retirement date. Caring for a sick family member may prevent you from working a full-time job, but you may still be able to work part time to keep some money coming in.
Next, you need to reevaluate your existing retirement plan. Think about how long your savings now have to last and recalculate how much you need to cover living expenses. Total up your monthly expenses, including new expenses that weren’t factored into your original retirement plan, like caring for an elderly parent. Then, multiply this by the number of years of your retirement, adding 3% annually for inflation. A retirement calculator can help with this. Keep in mind that if you have a serious illness, you may now have a shorter life expectancy than you’d previously thought.
Look for ways to make up the difference between what you have and what you need. This may include cutting back on expenses where possible and foregoing travel or large purchases. If you’re 62 or older, consider signing up for Social Security if you haven’t already.
You won’t get your full benefit amount per check if you’re under full retirement age (FRA) — 66 or 67, depending on your birth year. You’ll receive a reduced amount, equivalent to your full benefit minus ⅔ of 1% times the number of months you are below your FRA. If your FRA is 66 but you start benefits at 65, you’d receive 92% of your scheduled benefit per check. If you delay Social Security, your benefits will grow at this same rate until you earn the maximum benefit at age 70. This is 124% of your scheduled benefit for an FRA of 67 and 132% for an FRA of 66. You can figure out how much your benefit will be by creating a my Social Security account.
While starting early means accepting less money per check, these benefits could make up for some of your lost income. This will reduce how much you need to withdraw from your retirement accounts, stretching your savings a little further.
There’s no need to wait until you’re forced into an early retirement to begin planning for one. Boost your retirement account contributions if you can and try to save more than you think you need. If possible health issues concern you, build these costs into your retirement plan. A 65-year-old couple retiring today will need about $280,000 to cover medical expenses in retirement, according to Fidelity. You could save for this in your retirement account or a health savings account (HSA), if you have a high-deductible health insurance plan. Money you put in an HSA is tax-deductible, and if you use it for medical expenses, you won’t pay taxes on it at all. Once you turn 65, you can use the money just like a regular retirement account, though you’ll pay income taxes if the money isn’t used for medical expenses. Single adults may contribute up to $3,500 to an HSA in 2019 and families may contribute up to $7,000.
Early retirement is great if you can afford it, but if not, it can be more stressful than your time in the workforce. While you can never be certain whether you’ll need to retire early, you can do your best to prepare today by saving as much as you can for retirement and thinking through how you would handle the situations outlined above.