Forced Early RetirementInsights Retirement Planning Investment Planning
Forced Early Retirement
According to a 2018 Urban Institute and ProPublica report analyzing data gathered by the Health and Retirement Study (a national study that has tracked a 20,000 person sample since 1992), of workers over the age of 50, 56% lost their long-term, full-time jobs involuntarily. When times get tough for businesses, “unfortunately, age discrimination seems to be the one form of bias that is still acceptable,” says vice president of Financial Resilience Programming for AARP Susan Weinstock. What steps can you take to mitigate the detrimental effects of a forced retirement?
Significant impacts to your lifestyle can be felt even by retiring just a few years earlier than anticipated. Many plan for a scenario in which they will spend less during their years in retirement. People like to assume they will not have a mortgage to pay, their cars will be paid off, credit card debt does not exist, and monthly expenses will decrease. While this may hold true for some, most retirees want to keep a very similar lifestyle to their working days. The opposite is yet true for others - more free time to occupy means delving into those “I’ve always wanted to’s,” be it hobbies, travel, or taking the time to learn something completely new. Those car maintenance bills might decrease from less time spent commuting, only to be replaced by a line item for travel expenses.
The best way to plan for a bump in the road to retirement is to not wait. Partnering with a financial planner to look at not only the rosy, sunny, perfect retirement scenario, but also the “what if’s,” is increasingly important to plan for the unexpected. At J.P. Cannata & Associates we use a range of sophisticated software dedicated to modeling and presenting not only the bright, colorful picture but also able to account for the less-than-ideal, giving our clients the peace of mind that they are prepared for their future.
As mentioned above, budgeting in retirement has a similar look to budgeting while working. Yes, some line items may change, but spending does not go down for most, even though many think it will. To prepare for an unexpected loss of income due to forced retirement, make certain your budget is reflective of what your true expenses are. Are you actually spending more than you thought? Do you have a comfortable margin? Are you able to set more savings aside? Or are you right on the edge?
Proper planning for a forced retirement is not all about the proactive steps of saving more money “just in case.” It is also about looking at how you spend and how much you spend. Getting a 20-20 view now is easier than cutting the extra travel, hobbies, or time money spent visiting the grandkids.
Get rid of debt
Look at your budget and determine how much of it is allocated to paying down debt. Whether it’s a mortgage, car payments, or a high-interest credit card, having a strategy now can help alleviate added financial stress later. Longer-term, paying debt down faster might have the added impact of helping to boost your savings or even afford a couple of additional trips to see those grandkids!
Consider Delaying Social Security Benefits
One question clients often ask is “when is a good time to start taking social security benefits?” Well, taking them as early as possible at 62 will reduce your benefit amount by up to 30%. Benefits are reduced, based on the age when you begin your distributions, until you reach your full retirement age, generally 67. If Social Security is an important source of income in your retirement years, delaying benefits will maximize the amount you receive. In fact, if you delay benefits until age 70, your social security will increase 132%, monthly forever!
How do you decide when to start receiving benefits? We know it can be complicated to calculate, so we’re here to help! Generally speaking, the longer you can delay, the better. But what effect does a change in that timing have? Our financial plans take into account all sources of income and all of your assets, to help pinpoint the ideal time for you to start receiving Social Security benefits.
Know the Costs of Inflation
Inflation is one of the largest killers when it comes to retirement savings. Since the Great Recession, the Consumer Price Index (CPI) has generally increased less than 2% per year. The historic average is a rate of about 3%. As of May 2020, the CPI was actually negative for the previous 12 months, -0.1%. But even at 2% inflation, your spending power is reduced by 22% in just 10 years!
A quick run with the U.S. Bureau of Labor Statistics CPI Inflation Calculator, says retiring with $100 in January of 1980 would require $329.56 to purchase the same basket of goods today! When you retire, the world around you will be more expensive. Your current checking account balance will have less buying power than it does today. This is an important factor to consider when designing any investment plan, but particularly important for retirement planning. These factors are considered in our planning process. Specific portfolio and investment allocations are chosen to help each client prepare for inflation and achieve their retirement goals.
Early Retirement Exploration
Does your employer offer partial retirement options? Some do, allowing many to work part-time and transition out of the company to a full retirement. Partial retirement allows you to continue to save, pay down that debt, grow your Social Security benefits, delay dipping into those retirement accounts, and ultimately puts you in a position to control your retirement.
Partial retirement can be a calculated step to mitigate the effects of a forced early retirement. It still might not be ideal compared to the full-time employment, but it is an option worth exploring, especially in these turbulent times. Talking to your HR team or management will allow you to consider the options and possibly save you from being forced out.
J.P. Cannata & Associates is here to help
A forced retirement is difficult. The more you prepare for both the perfect scenario and the less-than-perfect scenarios, the less financial hurdles you’ll have to jump. We know preparing and planning alone can be intimidating and that’s why we are here to help. A good financial planner should be a trusted partner, helping and supporting you through not only the planning process, but adjusting the plan as time goes on. A plan should be a working document, likewise your financial planner needs to help you to adapt. Flexibility is important, as is a true understanding of who you are, where you’re at, where you’re going, and just how and when you want to get there.
At J.P. Cannata & Associates we strive to craft individually tailored financial plans for each of our clients. We will help guide you through the financial planning process and assist you in making difficult financial decisions. We ask the hard questions and plan for the unforeseen, so you are prepared for the absolute best-case scenario and the less-than-ideal scenarios.