Being forced into an early retirement could be a good or bad thing, depending on how you planned your later years during your early years. Some employers have an early retirement plan in place for their employees. Some employers never planned that some employees would choose to retire early and never planned that they would have to force employees into early retirement.
If your employer has early retirement plans in place, you may still have to budget your savings so that they will last longer. You may even have to work again. A person may even wish to work because he or she cannot stand sitting around at home. A forced early retirement doesn’t just affect a person’s finances. It affects a person’s behavior and personality because some people just cannot sit at home. Some people may feel useless, even if there is a lot of work that can be done at home, such as repairs and landscaping.
If an unplanned early retirement affects your personality, even if you do not need the money, you may want to get another job — or at
least a part-time job — to keep yourself busy. The extra money will come in handy in many ways, but the most important way is that it stretches your retirement savings.
If you do not have a strong retirement savings account in place, it is never too late to start. If you are still working, but are hearing whispers about downsizing, now is the time to start saving money. Even if you have retirement accounts, you should start socking away extra cash while you can. Chances are, you planned retirement for a certain age, and if you are “lucky” enough to be chosen for early retirement, your current savings may not be enough to carry you for the rest of your life.
There are several effective downsizing methods that an employer may use, but if the economy is especially poor, he or she will use workforce reduction. Workforce reduction directly affects you as you may find yourself out of a job. If the timing is right, you can retire early. If you planned on working until you reached 67 and early retirement is thrown at you at 65, you may need to work a little extra or be extra careful with your savings. If you planned on working until you reached 67 but early retirement looms at you at 55, you have some issues to deal with.
Some companies may have early retirement programs. If you are forced into early retirement, check your company’s polices regarding early retirement. You may have extra benefits of which you were not aware.
While you may have to change your lifestyle if early retirement comes only a couple of years early, you will definitely have to change your lifestyle if it comes several years earlier than expected. This means working out budgets or possibly getting another full-time job.
If you do get another job, you must decide what to do with your current retirement accounts. You could leave them with the same employer and let them grow, you could roll the retirement plans into a plan with the new employer, or you could cash the plans out. You should contact a tax attorney before making this decision, as there are tax ramifications for cashing out early. At the least, you should speak with your plan administrator. On top of taxes you may have to pay, most plans charge a fee for early withdrawal.
Lowering your expenses using a budget analysis is one of the ways to ensure that you have enough funds for retirement if you’ve been forced to retire early and do not want to get another job or cannot find another job. Create a spreadsheet or download the sample worksheet from “How to Lower Your Expenses Using a Budget Analysis” to help you analyze your budget.
The worksheet helps to show you where you can cut expenses. Some ideas are cutting extra movie channels from your cable package and changing your shopping habits. Purchase food in bulk, and then package it in individual portions to save money. If you do not have a large freezer, a new chest freezer would be a good investment. It will pay for itself over a short time with the amount of money you save on food.
If you go out to eat several times per week, cut back on going out. Eat at home most nights and save dining out for once every couple of weeks or for special occasions depending on whatever your new budget will support.
Make sure you turn off lights and other electrical items when you are not using them. Purchase a timed thermostat for your home. You will notice changes in what things cost you as you track the costs in your budget.
Creating an expense sheet for the budget shows you the minimum you need to support your household. Make sure you include all
utilities, food costs, and other expenses. Don’t forget hidden expenses such as bank fees and other expenses that might be automatically taken from your bank account or charged to a credit card.
You may have planned for a fun-filled retirement with travel and other activities. If you’ve been forced to retire early, with proper planning and restructuring, you can still have fun. Learn how to save on groceries and other necessary facets of life so that you can still enjoy retirement even if it was forced on you earlier than you expected.
If you have more than one retirement account, plan accordingly if you need to withdraw early. Some retirement accounts may be completely tax-free if you are over a certain age. If your unplanned, early retirement falls when you are 59 ½, you may be able to withdraw money from one of your accounts without having to pay taxes. You will still most likely have to pay the early withdrawal fees charged by the plan, though, so compare the cost of withdrawing from all accounts if you must withdraw early.
Make sure you know what accounts you have and their pros and cons. If you do not understand the tax ramifications as provided to you by your plan documentation or the IRS web site, contact a tax attorney so that he or she can explain the ramifications to you. The tax code is complex, especially when dealing with certain types of retirement accounts. Withdrawing from the “wrong” account could cost you money that you could use later in life.
Early withdrawals from your 401(k) could saddle you with some crazy penalties and taxes. If you are in a higher tax bracket, you could end up owing several thousand dollars to the IRS just for taking $20,000 out early. If you need money because of early retirement, choose which account you withdraw from wisely.
If you do not have a retirement account, such as a 401(k) or IRA, and you are eligible for social security, you might consider working until a later age. Social security benefits increase by eight percent for each year you work over the age of 62.
One of the options you have if you were forced to retire early is to invest some of your non-retirement account savings. If you do this, research your options carefully. You can invest in the stock market or precious metals. Always be aware of scams that just take your money. If you do choose to invest, you should invest through the services of a certified financial planner.
If you have certain pension accounts, these accounts may have been affected by the stock market. If you were hoping the pension funds would increase in a better market, but were hit with early retirement instead, you could be left short of funds for a full retirement.
Watch your pension funds closely. If you suspect you are going to be targeted for workforce reduction via early retirement, you may want to consider moving those funds if any fees and taxes are less than the benefits gained by moving the funds into a safer account.
You can use a retirement calculator to determine how much extra early retirement is going to cost you. If your mortgage is going to be paid off soon and you have other debt that is going to be eliminated, don’t forget to subtract that at the proper time. As you age, you also tend to have more medical expenses. Add in additional funds to cover medical expenses. You won’t be driving to work every day, so you are saving a big chunk on fuel for your vehicle. You will be making many adjustments. Figure all of these into your current expenses, then enter the numbers into a retirement calculator to determine whether you need to continue working or you can enjoy early retirement.
Create a new budget once you know that you are going to be forced to retire early. Include projected expenses, since some of those expenses will decrease or be eliminated completely. Some expenses may increase. Working with a comparative budget and a retirement calculator will show you whether you can afford to take the early retirement.
Everyone’s situation is different. Some have large retirement accounts that have been growing since their early 20s. Some people have no retirement, and the thought of early retirement is scary. Work out early retirement and revamp your plans. It may still be possible to take the early retirement and not have to work.
Do you have any questions? Would you like to offer suggestions? Use our Comments section to share your experience or opinions.
- Photo: Single Family House by SanibLemar under Public Domain
- Photo: Stock Market Learning by Cultureisbetter under CC-BY-SA 3.0
- Author's own experience and information from article links.
- Photo: Money by J.J. under Public Domain