Preparing for an Early or Unexpected Retirement

Casey Bear |

Planning for retirement is without a doubt a long-term project that takes years of saving and adjusting to prepare for successfully. It certainly isn’t a "fix it and forget it" endeavor. But no matter how well you prepare or how diligently you save, the reality is that health issues, company downsizing, a worldwide pandemic, or simply personal preference may put you face to face with an early or unexpected retirement. How common is retiring early? Perhaps more common than you might think.

According to a 2021 study by Allianz Life, 68% of Americans retired earlier than expected and for reasons outside their control; that number was up from just 50% who retired earlier than expected before the COVID-19 pandemic. Similar to 2020, the majority in 2021 said they had to retire for reasons outside of their control, including healthcare issues (33%, up from 25% in 2020) and unexpected job loss (22%, down from 34% in 2020).

A once-in-a-generation event like the COVID-19 pandemic can encourage those near retirement age to evaluate their preparedness for an early or unexpected retirement. Of course, you’ll always want to consult with your Cranbrook Wealth advisor before making any life-altering decisions, but here are some items to consider should you find yourself in this position:

1. Plan Your Exit Strategy

Leaving the workforce is a process that involves far more than packing up your desk on your final day and heading for the door. Besides your steady paycheck, you’ll be leaving behind other employer-related benefits such as health insurance coverage and retirement account matches. In order to receive all your benefits, especially in a profit-sharing situation, for example, you’ll need to time your exit strategy with care. Do you have paid leave you can cash out? If so, when are you eligible to do so? Take advantage of all your benefits before leaving. After all, you earned them. Those with partnership interests in a business (or businesses) should ensure ownership paperwork is in order and allows for a fair break from the partnership. Ample advance communication with legal and financial advisors, as well as with the other owners or partners in the organization, can ease this separation process.

2. Consider the Tax Implications of Retirement Plan Offerings

The structure and value of retirement plan options can vary greatly from employer to employer. If you are choosing to retire voluntarily, that is you aren’t being offered a buyout or early retirement plan option, you’ll likely be able to choose between taking a lump sum up front or phasing out your retirement benefits over time. Of course, you’ll need to decide which option best aligns with your other retirement income sources and how the tax treatment will affect your after-tax, take-home amount. For example, if you expect to have a higher income down the road, you may choose the lump sum option now rather than later when the extra income could bump you into a higher tax bracket. In reverse, if you anticipate having a lower income later, you may decide phasing your benefits out is a better option. A Cranbrook Wealth investment professional can help you decide which scenario you prefer.

3. Align with Your Spouse

Your ability to manage your income and mitigate your tax burdens can largely determine the longevity of your retirement savings. Therefore, if you are married and pool your income with your spouse, you’ll want to align your retirement plan options with theirs. Planning together will give you the highest probability of success for maximizing your long-term income, making the most of your social security benefits, and managing taxes over time.

4. Decide on Healthcare Coverage

You’ll want to make sure you have healthcare lined up so you don’t suffer a lapse in coverage. If you aren’t yet eligible for Medicare, you will need to decide whether it is more beneficial to purchase your own individual insurance or extend your employer coverage through COBRA, unless you plan to self-insure. Keep in mind, COBRA coverage is only available for a limited time after you leave your job so you’ll want to make sure it bridges the time gap you need beforehand.

Taking the Leap

Taking an early retirement may not be in your plans, but external forces outside your control could force this to become a reality. In the event you are faced with this decision, be sure to consider all the short and long-term consequences of your actions. No one wants to outlive his or her assets or become a financial burden on their family.

Curious if an early retirement could be in the cards for you? Contact a Cranbrook Wealth investment professional to learn about your options.