Retiring Before Your Time - American Financial Management Group | Philadelphia Financial Planner

Retiring Before Your Time

When most of us take a trip, we make a plan so we can enjoy the journey. When you hop into the car for a drive, how much more scenery do you take in when you know where you going as opposed to anxiously guessing where the next turn will be?

A key part of any grand plan is accounting for the unexpected. Having a back-up plan allows you to adjust with minimal panic. As the great pugilist-philosopher, Mike Tyson so eloquently phrased it:

I’m personally not a pessimist by nature, but as a retirement income planner, I do spend a lot of time talking about the possible pitfalls in retirement. 

Why talk about the negatives?  As an advisor, the line from the movie “Apollo 13” that can keep me awake at night is “Hell, we’ve never even simulated it before, Gene.”  The unexpected creates problems.  However, if we have at least talked about the possibility of a problem, then we should be better prepared if it happens.

That is why I spend the time talking about risks in retirement.   The cornerstone of this effort is the 18 Risks You Face in Retirement.

Many of these 18 risks we know we will likely confront in our retirement – so we prepare.  Investment values, interest rates, and inflation will all go up and down. Health issues will arise the older we get. But Forced Retirement Risk tends not to be one of the risks we rarely think of and thus unprepared when it happens.

Forced Retirement

When I discuss this risk with people, the push back is along the lines of, “It will not happen to me because I’m healthy (or too valuable to the company, or I own the company, etc.).”  I have talked with several people who thought it wouldn’t happen to them, but it did. 

According to one survey, more than half of retirees said they retired earlier than planned. And this survey was done before the Covid-19 pandemic, which will probably create a spike in those numbers.

Compounding the issue is the suddenness with which it may appear. Remember how fast the current pandemic spread?

During about a three-month period we went from the discovery of a new virus in a part of China most of us had never heard of, to witnessing the shutdown of nearly the entire planet.  How well were you prepared for the quarantine?  For those of you tempted to say you had no issues, I have two words for you: toilet paper.

Now imagine your mom or dad having a fall, necessitating you becoming their caregiver, thus having to quit your job. Or your company announces the they are relocating, resulting in a mass layoff.  You may find yourself thinking fondly of how much time you had to prepare for Covid!

How to prepare

Vigilance is needed to reduce the chance of forced retirement.  Pay attention to your industry: could additional training help keep you employed? Networking is useful; you never know when an opportunity could present itself.

Have a Plan B (or C or D).  If you do get laid off, could you freelance or consult?  Again, having a strong network of contacts could be useful.

You can also be proactive in your personal life.  Have conversations with your parents about their plans for aging.  Knowing those plans and what resources they have available allow some measures to be put into place before they are needed, which could lead to a smoother transition. 

It is better to plan when you can and not when you must.

Preparation is complicated because we do not know why we will have to stop working, and the “why” could influence your reaction.  Being laid off means you can still work, even if only minimum wage as opposed to quitting due to health reasons that prevent you from working.

Generally, forced retirement is a math problem: it results in fewer years of savings and more years ofspending.  If you plan on retiring at 65 but instead stop working at 60, you now must deal with five fewer years of saving (and the associated growth), and five more years of spending.

Forced retirement creates the situation as longevity risk does, using your resources longer than planned.  Though with longevity, the risk is at the end of retirement, while forced retirement is at the beginning.

Income, critical ages

Regardless of your age, having emergency savings will buy you time as you figure out your next steps.  This will not help with the reduced contributions to your retirement accounts, but it will give you more flexibility in deciding which accounts to use for spending. 

Of course, everyone must understand the age limits for your benefits and retirement accounts.  Depending on how well you have saved for retirement, maximizing your Social Security benefits, for example, could make all the difference. 

  1. Social Security
    With reduced savings, you may need to have more guaranteed income, which includes delaying Social Security.  You can start collecting Social Security at age 62.  The cost of starting early is your amount is lower versus what you would receive at your  Full-Retirement Age (FRA).  While the formula used can get complicated, most of us will see a reduction of 25% – 30% in benefits by starting at 62.  Clearly, delaying collecting Social Security is worth investigating.

    The trade-off from delaying Social Security is that you will need to use more of your assets in the intervening years: savings, house, collectibles, etc.  Your specific situation will dictate which options will work best.  You need to be honest about your position.  If you are never going back to work, your approach will probably be different than if you are likely to be able to work again at some point.
  2. Retirement Accounts
    If you are using retirement savings (IRAs, 401k, etc.), the age 59½ is crucial.  If you are younger than 59½, then you will have a 10% penalty on withdrawals unless there is a special situation

    Be careful about using these exemptions since some apply to IRAs only, and others only apply to your workplace retirement account.
  3. Reverse Mortgage
    If you are 62 or older and own a home, you are eligible for a reverse mortgage.  There are pros and cons to using a reverse mortgage, but the fact is that you can borrow against your home’s value, access the money tax-free, and not have to pay the loan back until you leave. 
  4. Other Considerations
    For our clients, we typically use a combination of options to generate the needed income.  We also pay attention to taxes.  Considering federal, state, and local taxes could eat up 20%, 30%, or even 40% of your withdrawals, paying attention to how you get your money is essential.

    A severance or a buyout package may be offered to if your job is eliminated.  In this scenario, you should re-run your retirement plan projections since this lump sum could offset some or all of the short fall created by ending your job.

Stress testing your retirement plan

The other thing you can do that will help is stress-testing.  We are used to hearing about US banks undergoing an annual stress test, which allows the regulators know if the banks can survive economic shocks.  But we can likewise stress-test our retirement plans. 

When designing a plan, we make certain assumptions about how long you will work and how much you will be saving.  The next step is to ask, “What if this doesn’t happen?”  To answer that question, you change the retirement to a younger age, which reduces savings.  This will give you an idea of what your financial life will look like with earlier retirement. 

Seeing the results may incentivize you to change your savings strategy.  Admittedly, if nothing bad happens, then you have probably sacrificed spending to boost your savings.  For some of you, the additional peace of mind may be worthwhile, while others may not want to (or cannot) make that change. 

Dealing with a forced early retirement is more about managing the situation than preventing the situation from occurring.  And you will experience emotional stress when the event happens, which we cannot prevent. 

However, through planning, you will hopefully be able to better deal with the shock by understanding where you stand and what adjustments can be made instead of fearing a great unknown.  That is the benefit of retirement income planning – giving you more confidence to live your best retirement by making the unknown, known.

If you are ready to start planning your retirement, reach out to schedule a free consultation with me here:

Investment Advice offered through Private Advisor Group, LLC, a Registered Investment Advisor.

This information is not intended to be a substitute for individualized tax advice or financial advice. Please consult your advisor regarding your specific situation.


Kevin focuses on helping people with retirement income planning. He is concerned that too many people become overwhelmed as they shift from building their retirement savings to using their retirement savings to support their desired lifestyle. By engaging in a robust planning process, he aims to lessen the financial fears we all have after we end our careers. Learn more about Kevin

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