For many of us, retirement can feel further away than it actually is. Whether you are starting a career in the middle of your most productive years or approaching the end of your working years, retirement is a transition that should be strategized from a number of different perspectives. The purpose of this article is to examine different scenarios that might lead to an unexpected change in your plans — maybe a year or two early, or perhaps much earlier than you might have anticipated. Some of the circumstances are good, and some are difficult, but all of them amount to an important decision you must make in terms of your career and your finances.
Although people work with ongoing medical conditions all the time, not everyone is the same. There may come a point where your body simply cannot handle the same activity every day. This is not limited to your physical health either. As more people attend to their mental wellness, some may discover that their jobs are an obstacle to feeling at ease. Whatever the health factor may be for you, it is possible to transition into early retirement over a period of time rather than leaving work immediately — for example, working from home rather than commuting every day. Transitioning may make things easier and allow for continued savings rather than an abrupt cut off of your working income, facilitating a more comfortable retirement when it is time to finally retire fully.1
It may not be your own health that is a factor in your early retirement. Taking care of a parent, child, spouse or other family member who needs your attention can be a reason. Although care professionals may be a big part of meeting your family member’s needs, it is likely that you will want to be a bigger presence in their daily life. Here, too, transitioning to working from home might be a financial stopgap to help you enhance your eventual full retirement.2
A Sudden Windfall
Not all of the circumstances that might lead to early retirement are negative. You might enjoy a sudden windfall in terms of investments, inheritance or some other unexpected financial benefit. The side-effect to this windfall is that it might make the daily grind a little less desirable. Perhaps even totally unnecessary. Something to think about before you retire to enjoy your new lifestyle -- you may find life without work a little too idle for your taste. If this isn’t a case where you’re transitioning to working fewer hours before full retirement, you might want to consider a new pursuit for your newly-discovered free time.
Of course, there are many transitional situations where the decision is more or less out of your hands. If the company you are working for is going through some sort of change, such as an acquisition, it may be in their interest to make some staffing decisions. Other situations may be something like a financial crunch for the company, where they can no longer afford to pay you. Although you might find that you need to seek other employment, it is possible that this dovetails with the “windfall scenario,” where the company parts ways with you via a “golden parachute.” In some situations, this parting gift may be a financial bridge to early retirement.3
A New Opportunity
It is also just as possible that your career is a means to an end for you and that you have been looking to build a new opportunity for yourself. Maybe it is to start a small business, such as a coffee shop or a bed and breakfast. Maybe it is to create a charitable organization, one that allows you to focus your energies on matters that are meaningful to you. Whatever opportunity you might have in mind for a way to use your retirement years to satisfy yourself, a new opportunity with built-in income for you may be a path worth contemplating.
If I Retire Early, What Should I Do About Social Security?
Whether you choose to or have to retire earlier than planned, a major consideration for most will be what do about starting Social Security benefits. For those between the ages of 62 and 70, you have the opportunity to begin claiming your Social Security benefits, whether you were planning to or not. This “safety net” of sorts could be an appealing opportunity to replace the income you may have lost due to an unexpected event, but this is a decision that shouldn’t be taken lightly. Here are some key considerations on whether to choose to start Social Security.
Considerations to Make Before Taking Social Security
If you weren’t already planning on claiming your Social Security benefits soon, then take the time to review your other options first. While you’re eligible to begin receiving benefits at age 62, every year you wait until age 70, your benefits will increase. While it’s tempting to take the money now, you could be missing out on thousands of dollars in future Social Security benefits.
Is There Other Income I Can Use?
If you’ve been saving diligently for retirement, you may already have the funds tucked away to get you through the foreseeable future. Review your 401(k) and IRA accounts, and remember to account for income through any pension plans you may have through work. After taking stock of these accounts and any emergency funds you have saved away, you may determine that claiming Social Security benefits early is not necessary. Even putting off claiming your benefits by six months or a year could make a considerable difference in your future benefits.
It’s also important to consider that if you’re earning less now than you were in previous years, you’ll likely be in a lower tax bracket come tax season. This would make now an advantageous time to tap into your retirement savings accounts, as your tax obligation on this income may be lower than if you had worked full-time in a normal year otherwise.
Have I Applied for Unemployment?
Depending on the circumstances, you may be eligible to receive unemployment benefits. This is designed to be a temporary benefit to help cover necessary expenses during times in which you are not working, typically due to a layoff. Eligibility requirements and benefit amounts will differ by state, so check with your local offices to learn more and apply. It's important to note that unemployment benefits are considered taxable income. But, depending on your needs, this could be a short-term, sufficient alternative to address your financial needs.
What if My Other Options Are Limited?
It may be necessary to begin claiming Social Security benefits early if you’ve exhausted other resources, or you don’t have much savings to begin with. If your only other alternative, for example, is to rack up high-interest debt, taking the Social Security benefits early is almost always going to be the preferred choice. Falling into a deep hole of debt is not an easy position to overcome, and it’s not an ideal way to start your retirement.
Two Important Notes About Taking Social Security Early
If you do choose to take Social Security early to help ease the financial burden of losing your job, there are a few important things to remember.
1. The Impact of Working While Receiving Social Security
What happens if you begin claiming Social Security, but you get your job back? If you begin working again or find a new job, you may be subject to having a portion of your benefits withheld. This would be based on how much you are making above the SSA’s exempt limit. The SSA uses a retirement earnings test to help determine this amount.4
2. Withdrawing Your Application to Receive Social Security Benefits
You could choose to withdraw your application for benefits within 12 months of becoming entitled to retirement benefits. For example, say you’ve chosen to take benefits now because you were furloughed or laid off. A few months from now, your financial situation has turned around and you’re earning again. With some careful consideration, you could choose to withdraw your application. This would mean you’d stop receiving Social Security payments, and it’d essentially “reset” them. Any future date you choose to begin receiving them again, that would be the date that determines how much you receive. If you choose this route, however, it’s important to note that you would be required to pay back any benefits you had already received.5
While claiming Social Security benefits now to address your sudden loss of income may be tempting, it’s important to take some time and consider all of your options. It may be the best move for some, but others could be robbing their future retirement without a need to.
Whatever your path to early retirement, it is always a good idea to run these scenarios past your trusted financial professional. Especially as it relates to Social Security. They can assist you in easing the transition and adjusting your financial strategy accordingly.