Unfashionably early: when retirement shows up unexpectedly

In 2020, 3.2 million more baby boomers entered retirement than in the previous year, according to a Pew research report.¹ Some of these retirements were forced by layoffs and buyout packages; others were driven by job-related exposure risks or larger reckonings with personal values or mortality. No matter the cause, making the jump into retirement sooner than you anticipated can greatly impact the plan you may have worked on with your financial professional. There are many questions to answer to understand the full consequences of shifting your retirement timeline.

First, what does your job provide for you, outside of a salary or 401(k) match? If you (and your spouse or partner, if you have one) use an employer-provided health insurance benefit, it’s important to research what your alternatives are after you or they retire. If you are 65 or older, you qualify for Medicare, but that also means you need to research the various supplemental plans to figure out which ones fit within your budget in retirement. Also, if it applies to you, consider your spouse or partner’s age. If they are covered by your employer’s plan and are not yet 65, they could be left without coverage. Unless your spouse or partner plans to continue working and you can both be covered on their employer’s plan, if either of you are not yet 65, you’ll need to explore your budget for purchasing a full-fledged insurance policy through your state’s health insurance exchange. Researching policies and their associated costs could make you rethink your desire to kick retirement off sooner rather than later. It’s crucial to review the long-term impacts of this additional expense with your financial professional so you can accurately judge the stress it may put on your retirement and savings accounts.

Just as consequential as the cost of health insurance is the question of whether to take your Social Security benefit before reaching full retirement age. Beginning payments prior to arriving at that age reduces your benefit for life. For example, according to the Social Security Administration’s website, someone born in 1959 who expects a benefit of $1000 a month when they reach full retirement age would only receive $708 per month (a 29.17% reduction) if they began receiving benefits at 62. Their spouse, who is entitled to 50% of their payment, would receive just $329 per month (a 34.17% reduction)², if taken at the same early age.

The cascading effects of retiring earlier than you’d planned do not stop there. If you have debt that you had hoped to pay off prior to retirement, you probably planned to do so using cash flow from your salary. The loss of previously anticipated earnings also means fewer contributions to retirement and savings accounts. So, in addition to starting to draw from your savings earlier, you are also starting with less money in the coffers than originally anticipated.

There are potential happy endings to early retirement stories, though. For example, if you are not leaving the workforce due to poor health, you could choose to find part- or full-time employment that would supplement your cash flow, allowing you to dip into your savings less or hold off from taking Social Security until your full retirement age. In fact, according to research done by the RAND Corporation, 39% of retirees aged 65 and older change their minds and reenter the workforce.³ You could continue to work part-time in your former career, or you could pursue work that incorporates a hobby, such as finding a job at a golf course or kitchen supply shop.

If searching for a new job is not in the cards at this point, finding another guaranteed source of income can be challenging. Purchasing an immediate annuity is one potential way to lock in a reliable income stream for the entirety of your retirement, regardless of how long that may be. It can be helpful to review the options available within the family of annuity products with your financial professional. If you are concerned with the risk of loss, a fixed annuity can protect your assets and mitigate that risk. If you’re more interested in keeping those assets exposed to the market through an index, but you still like the idea of a certain amount of protection, you may want to explore new registered index-linked annuities. There are many options available to customize a policy to fit with your specific situation. There can also be tax benefits, since the earnings are taxed as income, not as capital gains.