Even if you didn’t experience it personally, you probably have vicariously felt the disturbances caused by the sudden and massive unemployment earthquake. It shook your families, your neighbors and the economy. And now, you may be experiencing an aftershock yourself – your own unexpected early retirement.
Whether you’re a dual income 50-something teacher who is unwilling to be exposed to Covid-19 at school, or a near-retiree who would rather retire now than deny a younger co-worker a needed job, early retirement is happening at breakneck speed, catching many individuals and families off-guard. Sometimes these voluntary retirements feel forced because they involve leaving work to care for grandkids or because the job now calls for new skills that are both unfamiliar and intimidating. Whether forced or voluntary, a surprise retirement is a daunting challenge.
Like any unexpected life event, early retirement can be disquieting and stressful. To both relieve the stress and avoid permanent financial harm, you should do everything possible to get ready and be ready for your last day at work. While every job has its own unique aspects, retirees should work through a curated agenda to make sure they have attended to important decisions now that may have consequences throughout the rest of their lifetime. Here are some key considerations to think through as a part of your work departure checklist.
check before you leave
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PRESERVE YOUR LEGAL RIGHTS. Terminations and retirements can blur in distinction, particularly when personal health is at issue. We don’t know where the legal system will end up post-Covid regarding people who left their jobs because of the danger posed to their health. If you are planning to permanently leave work due to risks related to your job, you should consider making your concerns known to your employer when you specify the reasons why you’re leaving. If you have a union or professional association related to your job, an important step is to discuss your termination with that entity before giving notice as well. Documenting these concerns may come in handy in any future legal actions.
SECURE HEALTH COVERAGE. These days, many individuals delay retirement until age 65 for the specific purpose of being able to sign up for Medicare. If that was your plan, but you’re now facing early retirement, health insurance is a crucial consideration.
Relying on the open exchanges for affordable health insurance after you quit is rarely a good idea, as this marketplace is roiling and unpredictable. The good news is that you may be able to extend your current coverage and let it bridge you until you’re old enough to qualify for Medicare. Under the CARES Act and related DOL and IRS actions, there has been a temporary extension of the period in which eligible employees can elect COBRA health insurance coverage and the deadline to begin making COBRA premium payments.
Still, these rules can be confusing, and they are temporary in nature, so it’s important to know your options before you leave. Key to your deliberations should be cash flow. While you may be able delay making premium payments under certain circumstances, this may involve catching up the premiums in the future, after you’ve stopped receiving your paychecks.
PLAN WHEN TO ELECT YOUR SOCIAL SECURITY. A potential landmine in early retirement planning is Social Security timing. It generally doesn’t make sense to elect Social Security retirement benefits before reaching full retirement age (age 67 if you were born 1960 or later). And there are many reasons to delay filing until age 70. However, between the need for cash flow due to an unexpected early retirement and the fear that the Social Security trust fund will run out of money, many retirees are filing as early as possible, often around age 62.
Some retirees take solace in knowing they have a 12 month “buy-back” option if they want to unwind their decision to elect Social Security. So, the thinking goes, “I’ll file for Social Security, but if I find a new job, I’ll undo my election.” This may be a classic example of the adage “decide in haste and suffer in leisure.” Electing to take this key retirement benefit at age 62 has a number of potential disadvantages that should be considered before filing:
- The buy-back option poses challenges. Because Social Security offices may be closed due to the pandemic, the administrative process for unwinding your election can be cumbersome. Further, the process requires you to pay back all benefits you’ve received, and that may seriously cut into your cash flow.
- If you end up returning to work, there are consequences to your Social Security benefit. First, if you elected early and you earn more than $18,240 (in 2020), Social Security will deduct $1 from your benefits for each $2 you earn over the threshold. You’ll eventually get these deferred benefits back, but it is nonetheless a reduction until you reach full retirement age. A related concern is the income tax you may incur on your Social Security benefits. A return to work can cause a sizeable portion of your benefit to be subject to income tax.
- With married couples, an early election can cause losses even after the retiree’s death. If after your death your surviving spouse’s benefits are based on your benefit, the lowered monthly check caused by your early election will be permanent.
LEAN ON YOUR RETIREMENT PLANS. Retirees typically assume they cannot access their qualified retirement plans without a penalty until after they are in their 60s. There are, however, ways to access benefits earlier.
First, if your employer-provided retirement plan allows, and you are permanently terminating your service, you can begin taking distributions as early as age 55 without incurring a penalty tax. Even with your Individual Retirement Accounts (IRA), you can access your funds before age 59 ½ by utilizing Code section 72(t). This allows penalty-free withdrawals from IRAs, 401(k), and 403(b) plans. Basically, the account owner must take at least five substantially equal periodic payments that are calculated based on the owner’s life expectancy.
Another approach is to take advantage of a temporary opportunity that comes from the CARES Act. During 2020, account owners can take a penalty-free withdrawal for up to $100,000 of Covid-related distributions from eligible retirement plans. Because of the payback rules for these distributions, they may offer some positive planning potential even if you don’t need the cash immediately. With these myriad rules, the possibilities are many, but the pitfalls are plentiful as well. You should address these options before leaving your employer.
THINK ABOUT PART-TIME EMPLOYMENT. Leaving your job doesn’t mean necessarily you have to leave the workforce. AARP has some good ideas on ways a retiree can get part-time employment to help supplement retirement income. For example, with teachers it may be possible to independently teach to a “pod’ of students in neighborhoods rather than teaching in a large, public school system. A retirement has occurred, but work continues.
EXAMINE HIDDEN SOURCES OF INCOME. If you’re going to need retirement income sooner than you thought, consider some of the assets you have that may be able to generate cash. Life insurance cash values could be a way to supplement retirement income, or you may be able to tap into your home equity with a traditional or reverse mortgage. Also, if you’re married, your planning should include how your spouse’s income may supplement the overall family income. There may be deductions from your spouse’s pay that can be changed, such as tax withholding. Sitting down and doing a budget is key to making this work.
PAY ATTENTION TO THE FINANCIALS. Retirement will obviously be a shock to your lifestyle. You wake up one day and don’t have a job to go to. But, retirement can also be a shock to the way you handle your finances. The examples are many, and failure to pay heed to these changes can be costly. Much of it comes down to cash flow and the need for a different budgeting process.
A common example is estimated taxes. While most employees handle their income tax obligations through managing their withholding exemptions at work, as a retiree you may have to file – and pay – quarterly tax estimates. Another example is insurance payments. Payroll deduction from is no longer available, so premiums must be paid in cash or an ACH transfer set up. And, if you are old enough to go on Medicare, but are holding off on filing for Social Security retirement benefits, the costs for Medicare Parts B and D and Medigap can quickly drain cash reserves.
Overall, the simple fact is that a sudden retirement will likely necessitate a thorough budget review and setting up new structures for banking and bill paying.
If you’ve suddenly found yourself in position of planning for an early retirement, you’re not alone. The pandemic-based “brain drain” has started and will likely affect the economy for years to come. Think of your surprise retirement not as a casualty of the pandemic, but as an opportunity to advance your planned departure. Consider it your new job – planning and executing your retirement. Seek out the hidden breaks and avoid the pitfalls. And, enjoy your retirement.