Amaka Chukwuma, Wealth of Geeks
More than half of all working Americans expect to retire at the age of 65 or older. In reality, only a third wait that long. The majority actually retire between ages 55 and 62.
The recent 2023 Retirement Confidence Survey, conducted among those looking forward to retirement, uncovers a notable disparity between retirement expectations and the reality of when people actually retire. The data presented a contrasting picture as workers reported retiring at a median age of 62.
This discrepancy indicates that a significant portion of the American workforce is retiring earlier than they initially planned. That has researchers considering whether retirement planning and financial preparedness may need to be radically adjusted to account for this trend.
Unanticipated retirements typically occur for health-related causes. A severe illness might be the undoing of a person’s retirement aspirations. Other commitments to one’s family may also necessitate one’s full attention. Additionally, people may lose their jobs, which can devastate their financial stability. Preparing for the unexpected means building a financial moat to guard against unforeseen, catastrophic events.
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Maximizing Social Security or other retirement benefits
When individuals retire earlier than planned, there are strategies they can employ to maximize their Social Security or other retirement benefits.
First, Adam Garcia, financial consultant and CEO of The Stock Dork, notes it is vital to understand the rules and regulations regarding early retirement benefits. While the full retirement age for Social Security benefits is typically around 66 or 67, individuals can start receiving reduced benefits as early as 62.
However, Garcia notes that choosing to claim benefits before reaching full retirement age permanently reduces monthly payments. Individuals should carefully consider the impact of early retirement on their benefits and assess their financial situation before deciding. There are a few options open to most people.
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Delay Social Security benefits
Delaying the claim of Social Security benefits past the full retirement age is one technique to increase benefits. Garcia claims that by doing this, people can boost their Social Security delayed retirement credits, enhancing their monthly payouts. Until age 70, benefits may rise by a set percentage for each year of delay. However, only those with other income or assets to rely on during the period of delayed payments may find this technique very helpful.
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Explore spousal benefits
Investigating spousal benefits is another strategy Garcia mentions. He asserts that even if a person retires early, they may be qualified to receive spousal benefits if they are married and their spouse is already receiving Social Security payments. As a result, the person’s benefits can continue to increase until they reach full retirement age or beyond, generating an additional income stream.
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How a 401(K) and Roth help
According to Polaris Asset Management, LLC CEO and financial advisor Alan Sell, CFP, ensuring that savers have amassed both Traditional and Roth retirement assets is crucial in preparing for an unplanned retirement. In retirement, this enables retirees to alter their tax bracket. Retirees can pick which accounts to take from to minimize their tax burden because withdrawals from a Roth account are tax-free, unlike withdrawals from Traditional IRAs and 401(k)s.
A typical situation where this tactic can be helpful, Sell illustrates, is when medical costs are more than anticipated. Retirees can use Roth accounts to pay for those expenses and avoid paying taxes on those withdrawals rather than completely withdrawing money from traditional retirement funds (and running the risk of moving into a higher tax bracket).
“Further, bumping into higher tax rates also causes more of a person’s Social Security to be taxed, creating what’s known as the Social Security Tax Torpedo among financial planners,” he says. “This is even more reason to make sure to have significant Roth balances ahead of time so that retirees can minimize tax on their Social Security payments.”
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Managing healthcare and medical expenses effectively
An expected retirement might mean losing access to employer-sponsored coverage. Garcia advises that individuals explore healthcare options such as private health insurance plans or the Health Insurance Marketplace. Comparing coverage, costs, and benefits will help identify the most suitable choice.
Individuals must also ensure continuous healthcare coverage and investigate appropriate options to fill the gap until they are eligible for Medicare. Garcia believes that understanding Medicare eligibility is critical. He emphasizes that enrolling in Medicare Part A and Part B during the Initial Enrollment Period is required to avoid late enrollment penalties. “Bridging the coverage gap between retirement and Medicare eligibility can be accomplished using options such as COBRA, private health insurance plans, or high-deductible plans combined with an HSA,” Garcia explains.
He also recommends that healthcare savings accounts like HSAs and FSAs be utilized to set aside pre-tax dollars for medical expenses. Negotiating medical expenses, staying proactive with preventive care, researching prescription drug options, and seeking financial assistance programs can further alleviate healthcare costs.
However, Sells recognizes that health insurance and healthcare, in general, might be difficult for early retirees. “The cost of health insurance can be astronomical for those not covered by an employer plan,” adds Sells. He suggests looking into medical sharing schemes like Medi-Share, emphasizing that they operate differently than standard health insurance. However, for those who do not fit the mold of the present health insurance system, Medishare may provide a different set of solutions for them.
Steps to take in the event of an unexpected retirement
Garcia recommends the following actions in the event of an unexpected retirement.
• Evaluate current spending
Evaluate current expenses and identify areas where spending can be reduced. Helps you assess their financial situation and make necessary adjustments. This assessment can assist you in determining your overall retirement income and ensure that your financial resources are allocated efficiently and effectively during this transition period.
• Trim discretionary expenses and prioritize the necessities
This helps align the budget with the new financial circumstances. Next, assessing available assets and savings is essential. Taking stock of retirement accounts, savings, investments, and other income sources can provide a clearer picture of the available financial resources. Calculating income sources, such as Social Security benefits or potential part-time employment, is necessary to understand the total income that can be generated during retirement.
• Adjust retirement goals
Adjusting retirement goals becomes essential, as unexpected retirement may require revising the retirement timeline, savings targets, or lifestyle expectations. Creating a revised budget based on assessing expenses and available income becomes crucial for financial planning.
• Consider health care cost
It’s vital to consider healthcare costs, explore health insurance options, and seek professional advice from a certified financial planner or retirement specialist who can provide tailored guidance. Prioritizing debt management, revisiting the investment strategy, and maintaining an emergency fund are additional steps individuals should take to adapt to new financial circumstances and ensure a more secure retirement.
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Final words
Maintaining financial flexibility is crucial to ensure a more secure retirement in the face of unanticipated circumstances. Prioritizing savings makes it easier to devise an exit strategy when the unexpected occurs.
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