6 Smart Moves if You Get Laid Off Before You Were Planning to Retire
The coronavirus pandemic has thrown many older workers' plans into disarray, as they lose their jobs before they'd planned to retire.
April saw the highest monthly job loss on record: 20.5 million jobs. Overall unemployment jumped to 14.7%, the highest since the Great Depression. For people age 55 and older, unemployment surged from 3.3% in March to 13.6% in April, according to the AARP Public Policy Institute.
“The pandemic is a shocking blow to virtually all workers," says Susan Weinstock, vice president, financial resilience at AARP. "But a third of the workforce is over age 50, and unemployment has hit them especially hard."
If you’re in that boat, you’ve got a lot of company. Here are steps you can take to help your finances stay on an even keel.
Apply for unemployment
As part of the $2.2 trillion federal CARES act designed to offer economic relief during the pandemic, people who are out of work get their state’s unemployment benefit — roughly half your regular income, typically — plus $600 a week. That extra money will be paid through July 31 and is retroactive to as far back as March 29, for those who had already lost their jobs by that point.
Self-employed, contract, gig, and freelance workers aren’t usually eligible for unemployment. Between March 29 and the end of the year, however, these workers can receive the same unemployment benefits as people who have lost full-time, salaried employment. Everyone, contract or not, is eligible for an extra 13 weeks of state unemployment benefits — for a total of 39 weeks, up from the usual 26.
You can get unemployment benefits if you’ve lost your job entirely or in certain circumstances if you’ve lost hours or income because of the COVID-19 pandemic.
Cut your expenses
Some of your budget items — meals in restaurants, a gym membership, theater tickets — have been eliminated for you. Others require discernment. You’re the best judge of whether take-out meals, alcohol, online streaming services, or other extras are essential or expendable.
With many of your smaller expenses on hold, review your biggest purchases. Cancel any big trips you may have planned for later this year.
The average cost of car insurance in the U.S. is $1,758 a year, or just under $150 a month. If you’re not driving one or more of your household’s cars, reduce or consider eliminating the insurance coverage on that vehicle.
If you’re having trouble affording your utilities, rent, or mortgage payment, call your utilities company, landlord, or bank, and ask them to work with you. Many banks and landlords are willing to make arrangements for clients and tenants to pay over time. Even if they’re not willing, many states have emergency eviction bans or have temporarily closed courts to all but the most important business during the pandemic.
Expand your job search
In addition to looking for a job like the one you lost, think about other work you might enjoy. “Get a part-time job or a side gig,” suggests Jarrod Winkcompleck, a financial planner in Austin, Texas. “People feel like needing a part time job means they weren’t fully prepared for retirement. There’s nothing to be ashamed of. Most people aren’t fully ready for retirement at 62.”
Tap your investments
Even with lower expenses and new sources of income, you may still have a gap between your bills and your resources. This can be a good time to take money from long-term investments in a taxable brokerage account, if you have one. As long as your income is no more than $40,000 this year — or $80,000 for a married couple — you’ll owe no capital gains tax. “You could also sell a loss to offset a gain and zero out your taxes for the portion of your income over $80,000, or pay capital gains taxes, which are still less than earned income tax rates,” Winkcompleck says.
This is also a good time to consider taking money from your pre-tax retirement accounts. The CARES legislation lets anyone who is affected by the coronavirus withdraw up to $100,000 from retirement accounts, without the usual 10% early withdrawal penalty that you'd have to pay if you're under age 59½ . You’ll still owe income taxes on money taken from tax-deferred accounts, but you can spread it evenly over tax years 2020, 2021, and 2022. Replace the amount you withdrew within three years, and you can claim a refund on whatever taxes you paid. If you follow these steps, you're in effect taking an interest-free loan from your traditional 401(k) or IRA.
Even if you can’t repay the money, an early withdrawal might make sense from a tax perspective. “Most people are reluctant to take withdrawals from pre-tax retirement accounts, but if they find themselves unemployed and looking to delay Social Security, now may be the best time to begin withdrawals,” says Gregory Kurinec, a financial planner in Downers Grove, Ill. After all, you're likely in a lower tax bracket now than you will be later. “Wait until age 72, when they’re forced to take distributions and will probably also be taking Social Security, then chances are they will pay higher income tax on the qualified money," Kurinec says. "People should not be afraid to use their qualified assets earlier in retirement to try and get the best tax treatment possible.”
Consider a reverse mortgage
If you’ve owned your house for a long time, you probably have substantial equity in it. People who are 62 or older can tap that equity in the form of a reverse mortgage. Instead of you making monthly payments to the bank, the bank pays you: a lump sum, monthly payments, or a line of credit that you tap only when you need it. You pay off the loan when you move out of the house or die, though some people pay the loan off before then, says Denver financial planner Kristi Sullivan.
Closing costs and interest rates are typically higher than for standard home loans, Sullivan adds, and you’ll need to show enough income to pay for property tax, insurance, and home maintenance. What's more, families often find themselves having to sell the home if the older adult needs to move to a care facility. It's important to understand the potential drawbacks of taking out a reverse mortgage.
Delay taking Social Security if you can
The proportion of Americans who take Social Security before reaching full retirement age is declining. About half of retirees filed for benefits at age 62 in 2005; by 2018, that was down to about a third. There’s a good reason to wait: your payment will be about 7.5% less for every year you get early payments, and about 8% more for every year you wait past full retirement age, up to age 70.
File at 62, and you’ll get between a quarter and a third less in monthly payments than you would if you waited until full retirement age, which is typically age 66 or 67, depending on your birth year. Hold out past your full retirement age, and your monthly check gets fatter, all the way up to a bonus of between a quarter and a third more if you wait until age 70 to claim benefits.
“Covid-19 is temporary, but your Social Security decisions are mostly permanent, and you’ll live with them for the rest of your life,” says Charles Sachs, a financial planner in Miami, Fl. “For the most part, people live long lives. Lock in the highest payment you can.”
There are a couple of single-use exceptions to that permanency. You can withdraw your application for Social Security benefits within twelve months of filing. Pay back whatever you’ve received, and the clock is reset. It’s as though you’ve never filed.
You can also take Social Security benefits early and suspend those benefits when you find another job. Your ultimate benefit check will reflect the age you’ve reached when you take benefits again, minus the time you spent taking early payments.
Pausing benefits will allow you to take advantage of other strategies to stay afloat financially, while you're relatively young. “It will be harder to have a part-time job when you’re 85,” Sachs says.
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