How to Prevent Forced Retirement From Ruining Your Golden Years
Involuntary retirement—or the possibility that you may be forced to exit the workforce sooner than you wanted—is a more common problem than you may think, and one that can wreak significant havoc with your post-career lifestyle. Some 46% of retirees polled for the Employee Benefit Research Institute's 2016 Retirement Confidence Survey said they left their jobs before they had planned, usually because of a health issue or company downsizing or restructuring. And a new study by researchers at Cal State Fullerton, George Mason University and Utah State found that many workers end up retiring four to seven years earlier than they had anticipated, potentially leaving them with a stunted nest egg that must sustain them through a longer-than-expected retirement.
You may not be able to totally insulate yourself from this risk, but here are three steps you can take to reduce the possible damage:
1. Create a savings cushion. One practical and effective way to minimize the effect of having to retire prematurely is to make a concerted effort to boost the size of your nest egg while you're still working. For example, let's say you're 30, earn $50,000 a year, receive 2% annual raises, save 10% of pay each year and plan to retire at 65. That would put you on a path toward a nest egg worth roughly $730,000 at retirement, assuming a 6% annual return. If, however, you were to find yourself involuntarily sidelined at, say, 60, you would have just $505,000 in savings, or nearly $225,000 short of the amount you would have accumulated had you been able to hang on until your projected retirement date.
By pushing yourself to save more during your career, however, you may be able to soften the blow of losing those final years of working and saving. For example, by saving 12% a year instead of 10% in the scenario above, you would have a nest egg of about $605,000 at age 60, reducing that $225,000 shortfall by almost half. And if you manage to save 15% a year, your age-60 nest egg would actually be about $30,000 larger than what it would have been at 65 had you saved just 10% annually.
Granted, you would still have to squeeze five more years of living expenses out of that nest egg than had you retired on schedule. But the point is that by saving more starting as early as possible in your working life—or for that matter, even making a concerted effort to set aside more for retirement in the middle or later stages of your career when your salary is likely higher—you'll have a bigger cushion of savings to fall back on. That will give you more flexibility to deal with the challenge of going into retirement sooner than you had anticipated.
2. Develop a Plan B (and C and D). Life doesn't always unfold as predictably as a spreadsheet, which is why it's smart to have a back-up plan (or two) ready. For example, even if you find yourself forced out of your job before you're ready to retire and are unable to find a comparable one elsewhere, you still may be able to land a part-time gig that can generate at least some income.That might allow you to delay dipping into your nest egg for a few years or, failing that, reduce the amount you must withdraw. To find companies that are looking to hire older workers and retirees, you can check out a site like RetiredBrains.
If you have substantial equity in your home, another option is to downsize to smaller, less-expensive digs. That may allow you to supplement your nest egg with a chunk of investible cash that may also be tax-free, provided your home-sale gain doesn't exceed $250,000 if you're single or $500,000 if you're married and file jointly. Prefer staying in your current home? Then you may be able to tap your equity for steady income or a lump sum via a reverse mortgage. You can learn more about both these options by checking out the Boston College Center For Retirement Research's free booklet Using Your House For Income In Retirement.
If you're willing to consider a more drastic move, you may be able to free up cash and lower your living expenses by simultaneously downsizing and relocating to a part of the country that has lower living costs. The general idea, though, is to come up with as many ways as you can to generate extra income and cut your expenses so you don't have to put as much strain on a smaller nest egg to get you through an extended retirement.
3. Come up with a realistic withdrawal strategy. Drawing enough from savings to give you the retirement income you need without depleting your nest egg too soon almost always requires a delicate balancing act. But the challenge can be even more daunting if your nest egg is smaller than you'd hoped and also has to sustain you through a longer post-career life.
For example, a 65-year-old who retires with $500,000 in retirement accounts and plans to withdraw an initial $20,000 from savings and increase that amount each year for inflation might have an 80% or so chance of being able to continue that withdrawal plan until age 95 without depleting his savings. But if that same person is forced to retire two years earlier with, say, just $430,000 saved, his chances of being able to withdraw the same inflation-adjusted $20,000 to age 95 could drop to less than 60%.
Which is why if you find yourself facing retirement before you'd planned, one of the first things you should do is gauge how much you can reasonably draw from savings without incurring too high a risk of running out of money too soon. You can make such an assessment by going to a tool like T. Rowe Price's Retirement Income Calculator or the American Institute of Economic Research's Retirement Withdrawal Calculator, both of which you'll find in the Tools & Calculators section of my Retirement Toolbox. If you're averse to doing such number crunching on your own, you can always hire a financial adviser to perform such an analysis for you.
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Clearly, the three steps above don't cover all the moves you might need to make to deal with the risk of a forced early retirement. For example, to protect against the chance of being unable to work due to a major health problem early on in your career, you'll need to consider whether to buy disability insurance. Nor do I want to suggest that carrying out the steps I've outlined will necessarily be a breeze. In the case of generating income by seeking employment, age discrimination can still be a formidable impediment for retirees and near-retirees looking to land a job.
But by realizing that you could very well end up retired earlier than you'd expected and then coming up with a plan for how to respond, you'll have a much better chance of adapting to the situation if it is forced on you and you'll be better able to make the best retirement you can given the circumstances.
Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at firstname.lastname@example.org. You can tweet Walter at @RealDealRetire.