April 2007

Financial Arrangements: Planning for an Unplanned Retirement
Wayne Bartolet

Planning and saving for retirement is a major financial issue for most of us.  Many of us spend years building our nest egg, with the goal of stepping into retirement financially and psychologically prepared.  However, sometimes retirement arrives earlier that we plan. 

A survey by the Employee Benefit Institute (EBRI) found that among people who retire early (before age 65), 43% retired earlier than they planned.  Some retire early because they come into sudden money such as an inheritance.  But many in the EBRI survey cited “negative reasons for retiring early, including health, disability, being laid off or having to take care of ill family members.  University of California researchers found that half of Californians retiring before age 50 cited health reasons for the early retirement.

What ever the reason an unplanned early retirement occurs, you will need to plan carefully to make adjustments.

First, do not make any immediate, rash financial decisions.  A wrong decision can cause financial problems the rest of your life.  For example, if you are retiring early because you have suddenly come into money, do not make major investment decisions right away.  Put the money into a cash account and leave it alone until you have time to think about what it can really provide for you.  If you have suddenly left your job because of a layoff or because you have to take care of a sick family member, you may want to immediate do a little financial belt tightening, but do not make other immediate major financial decisions.

Revise your financial plan, or if you do not have one, create one.  This is the single most important act you can do to give yourself control of your new retirement.  This is especially critical if you have been forced to retire for “negative’ reasons.  You will want to review the entire gamut: income and outflow, insurance, estate planning, investments, possible government assistance and so on.  Maintaining control of expenses is a critical component for any retiree, since income may be more limited.  But controlling expenses is especially critical for unplanned retirements.  For one thing, early retirees typically face major expenses that would often be gone in normal retirement:  mortgage payments, for example, or college expenses.  They also may start paying out of pocket for lost employee benefits.  Early retirement to care for an ill relative will probably result in some money out-of-pocket for that relative.  A budget becomes absolutely vital to keeping expenses within line of income.

Retiring early means more years of retirement to pay for.  This is a double whammy because you not only have more years to pay for (unless your life expectancy is reduced due to poor health), but you end up with fewer working years to fund the retirement.  Your later work years are usually when you earn your most income and can best sock away for retirement.  Traditional pension plans also are skewed toward late-career earnings, which you may now miss out on.  You will also have more years for inflation to erode the value of your investments.  Again, controlling expenses becomes vital.

Investments present another difficult challenge.  On the one hand, you have a longer retirement to fund than originally planned.  Investing more “growth” oriented can help make up for some of that shortfall.  On the other hand, if you have retired earlier than planned for negative reasons such as a loss of job or health, you are probably going to need immediate cash flow from your investments to help cover expenses, and that can mean investing more conservatively.  Review with an investment advisor how best to go about this.  It may require adjusting your portfolio so that part of it generates more income while the other part grows through non-income producing investments.

Retiring early means more years until you qualify for Medicare.  Be sure you are covered at least by a major medical policy, even if finances are tight.

Address the psychological implications of early retirement.  Even for planned retirements, leaving the workforce can be a difficult emotional adjustment.  It is tougher with an unplanned early retirement because you have not had time to mentally prepare for it.

It is important to take a deep breath, sit down and think through your new circumstances.  Whether for positive or negative reasons, an unplanned retirement needs to be planned for.