What if you find yourself facing early retirement due to a job loss, health condition, or another circumstance you did not anticipate? The Wall Street Journal recently reported that the percentage of retirees in the U.S. population rose to 19.4% as of October 2021, up from 18.3% in early 2020, partly because of the pandemic, but also because of rising portfolio and home values.
Early retirement can be a good thing — it can be a great opportunity to do something new and different — but getting caught off-guard financially can lead to a retirement savings shortfall. With fewer years on the job, there’s less time to build up retirement savings, and your nest egg needs to last for a potentially longer span of years in retirement.
Protect your future
Consider the following steps to protect your financial future if you retire earlier than expected.
- Control expenses. Review your budget and identify areas where you can trim spending. You may decide to postpone large purchases and cut back on the nonessentials to make your budget stretch further.
- Build an emergency savings cushion. Aim to save at least three to six months of living expenses in an account that’s easily accessible. If you have emergency savings, this money can help you pay the bills and avoid raiding retirement accounts right away.
- Control your debt. Reduce debt before you reach retirement and avoid taking on new debt if possible. If cash flow is an immediate concern, you may look for ways to lower monthly payments by refinancing to a lower rate or stretching payments over a longer term.
- Review Social Security. Weigh your options for taking Social Security benefits sooner or later. You may be eligible for a reduced Social Security benefit at age 62, but if you hold off until full retirement age at 66 to 67 you’ll receive a larger monthly benefit. (Benefit amounts do not increase with delays beyond age 70.)
- Think twice about tapping retirement assets. Review the consequences of dipping into an individual retirement account (IRA), 401(k) or other retirement plan. Withdrawing money before retirement age can be costly — taxes and penalties for early withdrawal in an IRA or employer plan may reduce your account balance significantly.**
- Consolidate retirement accounts. It may be advantageous to have all your retirement accounts in one place and have a plan as to how, when, which, and how much to take out of the accounts to last you a lifetime. Consulting a professional financial advisor can help you make the right decision for your future.
- Plan your health coverage. Medicare eligibility kicks in at age 65, so you may need to bridge the gap if you retire early. Investigate your options, which may include COBRA continuation coverage through a former employer, coverage on a spouse’s plan, or an individual or family health plan.
- Reevaluate insurance. Look for ways you can save on auto, homeowners, and life insurance in light of your changing circumstances.
- Don’t rush your financial decisions. Resist the urge to make drastic changes — such as cashing out insurance policies or overhauling your investment portfolio — on a whim. Give yourself time to reflect. Consider seeking guidance from a financial advisor to make a plan for the future. Our advisors at Hanscom Investment Services† are available to help. Call 800-656-4328 ext. 2236 to schedule a confidential appointment.
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** Taxes will be due at ordinary income tax rates upon withdrawal from a traditional individual retirement account (IRA) or employer-sponsored retirement plan. Premature withdrawals (generally, those made before age 59½) may be subject to a 10% tax penalty, too (does not apply to 457 plans).
†Securities and advisory services are offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. Hanscom Federal Credit Union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL offer products and services using Hanscom Investment Services, and may also be employees of Hanscom Federal Credit Union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, Hanscom Federal Credit Union. Securities and insurance offered through LPL or its affiliates are:
Not Insured by NCUA or Any Other Government Agency / Not Hanscom Federal Credit Union Guaranteed / Not Hanscom Federal Credit Union Deposits or Obligations / May Lose Value