For decades, you’ve planned for retirement and now the day has arrived. Unfortunately, it’s ahead of schedule—and unexpected—in the form of forced retirement. As many as 4 million older workers were pushed into early retirement in 2020, yet another blow delivered by the global pandemic.
If faced with early retirement, what would you do? Consider these five strategies to get ahead of the curve and turn an unexpected life change into an opportunity to live your best life.
1
Negotiate Your Exit Package
If the writing is on the wall and your exit is imminent, step up but don’t step out right away. Don’t assume that you have to accept that severance package as-is. Review your employee handbook to find out what (if any) guidelines are in place. If you signed an agreement upon joining the company, dust it off and review that as well. Find out what room you have to negotiate the terms of your departure.
Consider all the benefits your company provided, such as vacation and sick days and insurance. Will you be compensated for unused paid time off? Can your benefits be extended beyond your last day? Full-time employees can receive medical insurance and some other employer-sponsored health benefits for several months after being laid off. If you pay a premium each month, you may try to negotiate with your employer to cover this cost while looking for a new job.
Think twice before you sign that severance agreement. If there are nondisclosure stipulations or other clauses that limit your ability to find new jobs or work as a consultant, consider whether it is more valuable to leave without severance pay.
That said, don’t leave anything on the table that’s rightfully yours. Examine stock options and 401(k) vesting to make sure you are getting all you can before you go. When in doubt, consult with an attorney if you’re unsure of what’s owed to you.
2
Review Your Retirement Savings
It’s time to review your savings accounts, including 401(k)s, IRAs, savings accounts, investments and property. Whether you manage your own investments or have a financial advisor, assess where all your assets stand and create a plan.
When reviewing your assets, consider what accounts you can draw from right away, and what, if any, you should liquidate. Ideally, allow funds in tax-advantageous accounts (such as municipal bonds, 401(k) or 403(b) accounts, 529 plans and certain types of partnerships) to continue to grow for as long as possible before you begin making the required minimum distributions.
3
Create a Retirement Budget
Short of peering into a crystal ball, how can you know how much money you’ll need in retirement? As with any budget, start tallying up your sources of income and project your expenses. And as it happens, there is a standard to follow.
Welcome to the 25x rule, a general calculation for how much you’ll need in retirement. It specifies that your savings and investments should equal 25 times your annual spending needs. The 25x rule allows for initially drawing 4% in your first year of retirement and adjusting future withdrawals as you go by the rate of inflation. (Check out this online calculator to help you determine how you’ll fare.)
Next, add any new income streams you may receive, such as Social Security and Medicaid. The longer you delay drawing Social Security benefits, the more you will receive. For example, the maximum monthly Social Security benefit in 2020 is $2,265 at age 62; $3,011 at full retirement age (66 for those born before 1960 and 67 for those born in 1960 and later); and $3,790 at age 70.
With a solid idea of your resources, it’s time to estimate your annual expenses. Peer as far into the future as you can to create a budget for the next 10, 20 or 30 years. You’ll want to include essential monthly expenses (food, clothing, utilities, housing, healthcare and transportation), nonessential monthly expenses (entertainment and gym and club memberships), essential periodic expenses (vehicle and property insurance and taxes, repairs, etc.) and other nonessential expenses (vacations and holiday gifts). And here’s the good news: As you move into retirement, some expenses fall away, such as payroll tax or saving for your kids’ college.
4
Make Money in Retirement
Need extra dough to fill your budget gap? Now more than ever, retirees are discovering “second acts” to help them meet financial needs, fill their free time and fulfill their passions. In the gig economy there are lots of opportunities to turn idle hours into cash.
Working part-time or consulting in your current field may provide the income necessary to cover what retirement savings does not. A side gig could also buy more time for your invested money to grow before you start drawdowns, or allow you to max out your Social Security benefits if you wait until you’re 70 to tap that resource.
5
Do the Retirement “Rightsize”
After evaluating your budget, you might want to scrutinize where your money is going. Is it time to trim your living expenses? Downsizing your home, moving to a city with a cheaper cost-of-living, buying a less expensive (or used) vehicle and cutting unnecessary monthly expenses (do you really need three on-demand entertainment services?) can help balance that post-retirement budget and may provide you with the retirement lifestyle you really enjoy.
Brigid Galloway is a freelance journalist who writes about personal finance and healthcare for media outlets, including Marketplace and NPR.