Many people hope and plan to retire in their 60s. But most of them end up entering retirement earlier than that.
According to a study by the Employee Benefit Research Institute in 2018, over 30% of workers predict they will continue working until the age of 60. But close to 40% of these workers quit the workforce way before 60.
The majority of them are forced into early retirement for health reasons, changes at their company, hardship, and disability. Many of us are facing a similar situation right now due to the pandemic.
And experts warn that people with no preliminary plan for early retirement can end up making bad financial choices. We don't want you to be one of them. So if you're going through this conundrum, here is what to do to protect your finances.
Take a Deep Breath
Many people tend to make drastic financial moves that could have serious consequences when hit with retirement unexpectedly. For example, those who drain their 401 (k) are more likely to attract huge taxes and early withdrawal penalties.
Before taking any step, it may be wise to take a deep breath. Talk to a financial advisor to help you run the numbers, look at your situation, and give you some options. But if you choose to do it yourself, start by:
- Preparing a budget based on your new situation.
- Evaluate your sources of income, such as savings and pension.
- List all your expenses.
- Look at how your expenses and lifestyle will change now that you're out of the workforce.
- Find expenses to cut to stretch your savings and save more money.
Create A Transition Plan
When you retire, a reality check comes to play. Your paychecks end, but your bills don't. You must find a way to transition smoothly from depending on your employer's paycheck to relying on your income streams.
Many experts and retirees recommend writing an income plan that clearly outlines your new income source such as a pension, Social Security, or annuity. The plan should also state when you will tap into these income streams and their financial implications like penalties and taxes.
Avoid Retirement Penalties
If you retire before the age of 59.5, you may need to dip into your savings. But while at it, be wary of early withdrawal penalties and find creative ways to avoid them.
For instance, if you own a Roth account, you can withdraw your savings at any time without attracting penalties as long as you have had the account for at least five years and hit the age of 59.5. But if you don't meet these requirements, you may be subjected to early withdrawal penalties.
Similarly, withdrawing money from a traditional IRA or 401 (k) accounts before attaining the age of 59.5 can lead to a 10% penalty. But if you can't wait or have no other option, use the 72 (t) rules to avoid the penalty.
The rule allows you to pull out equal periodic payments from your IRA account until you turn 59.5 years. Be sure to study the 72 (t) carefully before using it. Violating the rules may trigger penalties on your withdrawals.
Don't Ignore Health Care
Many workers get shocked at how expensive health insurance can be when they have to pay on their own. When dealing with early retirement, check to see if your employer may continue offering the coverage as a benefit or not.
If not, it pays to find an alternative elsewhere. Health care costs can bankrupt you and your loved ones. So don't underestimate its importance.
Fortunately, you can find health care options on reputable platforms such as the Health Insurance Marketplace. The amount to pay will depend on your household income and preferred plan.
Dealing with early retirement can be shocking. If you're not careful, you could end up losing thousands of dollars you worked so hard to save. So if you get retired, take a deep breath before making financial moves, have a transition plan, avoid losing money in penalties, get health care coverage, and take on part-time jobs start a retirement side hustle to protect your finances.