Not everyone can transition smoothly into retirement. Unexpected events can sever workers from their work lives in ways they hadn't planned for — making them forced to retire.
And being forced to retire for whatever reason can upend even the best financial plans.
"A surprise retirement is a stress-filled challenge," said Steve Parrish, co-director of the American College Center for Retirement Income.
Prepare If Forced To Retire
Forced retirement is more common than you might think. Financial advisors say circumstances forced 40% of their retirement clients to retire, according to a recent survey from Edward Jones, a financial services firm.
While many people plan for retirement, fewer plan for an early retirement.
As a result, money issues quickly rise to the surface. That's especially true for sudden retirees who face the one-two punch of having to fund a longer-than-expected retirement while having fewer years to earn income and boost savings.
"The biggest threat facing someone forced to retire early is the potential for financial instability due to a sudden reduction in income," said John Bergquist, managing member of Lift Financial.
So, what do you do if your Golden Years started unexpectedly early?
Review Your Exit Package
Before you punch out for the last time at your job, thoroughly assess your exit package from your employer. Your goal? "Secure the best package and make choices that minimize the financial burden," said Bergquist.
The major things to consider carefully, of course, are your pension (if your employer offers one) and health care coverage. And don't forget other benefits, such as life insurance, disability coverage, or stock options you're eligible for.
The big pension decision is whether to take a lump sum or opt for an annuity-like monthly payment, says Cameron Burskey, senior partner and managing director of retirement security at Cornerstone Financial Services.
Given the importance of this decision, review your overall financial situation and consult a financial professional before deciding. "I recommend you request a quote of all payment options ... and carefully consider what is best for your financial goals," Burskey said.
Consider Health Options If Forced To Retire
If you were forced to retire before age 65 and are not yet eligible for Medicare, you'll have to evaluate all your health insurance options.
"Health care should always be a top priority," said Kelly LaVigne, VP of consumer insights at Allianz Life. "Medical bills stack up quickly and are a common source of financial anxiety."
You essentially have three coverage options: The first is getting temporary COBRA continuation coverage from your previous employer. COBRA typically lasts 18 months but can extend to 36 months depending on your qualifying event, according to the Department of Labor. But be aware that COBRA will cost you more than you were paying while you were still employed. You may be required to pay the entire premium for coverage up to 102% of the cost to the plan.
"Although COBRA is expensive, it's a known solution and may come in handy for short-term coverage," Parrish said.
Your other two options are getting health coverage on your spouse's plan or purchasing a policy through the Affordable Care Act's (ACA) health insurance marketplace. What you're looking for is an affordable plan that provides you with the essential coverages you need.
Analyze Your Finances If Forced To Retire
The next step is to "take stock of your financial life," said Rob Leiphart, VP of financial planning at RB Capital. Create a revised financial plan that addresses your new financial circumstances. And if you're one of the 42% of Americans in the 2023 Annual Retirement Study from Allianz Life who said they don't have a financial plan for retirement, now's the time to map out a plan.
Evaluate Your Investments
See how much savings you have and how much income they will generate. And, most important, determine how long your nest egg will last, Bergquist says.
The bottom line: Figure out what forced retirement means for your retirement strategy and ways your retirement accounts can help generate much-needed income.
"There's no fault in leaning on your retirement accounts for income if needed," Parrish said.
Forced To Retire? Pay Attention To Penalties
And if you're forced to retire before 59-1/2, you may be able to get at your retirement savings without paying an early-withdrawal penalty.
"In last year's Secure Act 2.0, Congress added six new ways to access retirement accounts penalty-free before 59-1/2," Parrish said. One example is a 72(t) systematic withdrawal plan. This allows penalty-free withdrawals from IRAs and 401(k) and 403(b) plans if the account owner takes a "series of substantially equal periodic payments," according to the IRS.
Another potential lifeline is the so-called "rule of 55." This rule allows workers who have an employer-sponsored retirement plan who have lost their job to start taking penalty-free withdrawals after they reach age 55.
Maximize Social Security
"A potential land mine in forced retirement planning is when to file for Social Security," said Parrish. Taking Social Security as early as 62, of course, means you'll receive a smaller benefit than if you wait till your full retirement age (age 67 if you were born 1960 or later). Ideally, you should wait till age 70 to take advantage of the additional 8% per year in benefits from age 68 through 70.
"Starting early at a reduced rate or delaying higher payments later is a complex decision that will not only affect you but could also impact your spouse," said Bergquist. That's why it's prudent to seek guidance from a professional.
If you need to take Social Security early and then, say, get a new job, the IRS offers a buyback option that essentially allows you to undo your early election within 12 months. The catch? You'll have to pay back all the benefits you've already received.
Manage Your Debt
If there's ever a time to create a budget, a forced retirement that robs you of a paycheck is one of them. "Identify areas where you can trim expenses to match your reduced income," Burskey said.
Cost cutting is critical. Figuring out a way to plan and pay for life's essentials is important, too. "What is crucial is putting a roof over your head and food on the table," said Leiphart. "You are in survive mode and you need to focus on those survival expenses only."
If cash flow is tight, you might consider raising short-term funds via life insurance cash values or tapping into your home equity, says Parrish. You might also consider paying down or consolidating high-interest debt if possible. If your exit package includes a payout for unused vacation days, consider using those funds to pay off high-interest debt.
Personal finance experts also suggest seeking out new sources of income if you're able to. Part-time work, freelancing or consulting to supplement your retirement income could alleviate a lot of financial stress.
"Remember, the key is to approach your situation holistically, considering both short-term needs and long-term goals," Burskey said.
