How to plan for forced early retirement

According to a 2019 survey from the Employee Benefit Research Institute, around 40% of people are forced to retire earlier than they expected. And with the COVID-19 pandemic leaving many people unemployed, you might be wondering how to plan for an unexpectedly early retirement. 

Here are some things to know about forced early retirement and ways you can start making a plan today.

There isn’t a strict legal definition for forced early retirement, according to Phil Nuttall, a director of wealth management from Capital One. 

Some people choose to retire early because they can afford to. Others experience circumstances that force them into early retirement. It could be anything from a layoff to an early retirement offer to a health issue.

Nuttall recommends that everyone approaching retirement age should consider early retirement a possibility. 

“When a life event is likely to happen to that large a number of people, it’s prudent for most people to plan for it as a realistic scenario,” Nuttall says. 

If you’re nearing retirement, the COVID-19 pandemic shouldn’t necessarily change how you’re planning for it. But the pandemic should remind you how important it is to prepare for the unexpected, according to Nuttall.

“The sheer volume of recent job losses suggests that many more people will be forced to confront unexpected early retirement,” he says.

According to Nuttall, how much money you’ll need to feel secure about retiring is driven by three factors: your available retirement income, your spending needs and your life expectancy.

“If your expenses are kept in check, then a much lower income is needed to support your lifestyle in retirement and vice versa,” Nuttall explains.

But being forced into early retirement can change how long you’ll need to rely on your retirement income. And that pushes up your schedule.

“The length of time you are in retirement is the difference maker in the equation for those forced to retire early,” Nuttall says.

Everyone’s retirement is going to look a little different. But the important thing is to have a plan in place if you’re forced to retire early.

“The key is to make sure that plan is robust enough to weather the storms that could occur,” Nuttall says. “A forced early retirement may not be the outcome you wanted, but a robust financial plan means it doesn’t have to be something to fear.” 

Having a plan helps you make informed decisions, Nuttall adds. And here are four things you can do to prepare for unexpected early retirement:

1. Take inventory of expenses and spending habits

Nuttall advises that you start by recording everything you spend in a month, using a spreadsheet or an automated online tool. Old-fashioned pen and paper will work too. 

Then think about other expenses that might pop up during the year and add them too. An easy way to do this is to estimate the total cost of an expense, such as a vacation, and divide the cost by 12. Then add that amount to your monthly estimate. Keep in mind that you should also consider inflation and how your expenses might change over time. And if you need to, there are ways you can start to cut expenses quickly.

“Once you think you’ve captured your unusual one-time expenses in addition to your recurring ones, you now have a great estimate of your overall spending habits,” Nuttall says.

2. Estimate your retirement income

The next step is estimating your retirement income. You can start by looking at all of your savings and retirement accounts to get an idea how far those will take you. 

Nuttall recommends people use modern technology, like computer programs, to help provide a robust and accurate spending plan. And if technology isn’t your strong suit, talking to a financial adviser is a great place to start. 

If you’re forced to retire early, you may have to make early withdrawals or borrow from your retirement accounts. If that’s the case, COVID-19 relief legislation might offer more flexibility. But be aware that doing so could end up costing you in the long run. A financial adviser might be able to help you understand the penalties and long-term costs that can be associated with early withdrawals.

3. Think about when you'll start taking Social Security 

If you’re faced with unexpected early retirement, one of the first things you might think about is whether to collect Social Security early. 

“Collecting Social Security later, if at all possible financially, is almost always a better deal than collecting it sooner,” Nuttall says.

But knowing when the time is right can be tough because everyone’s situation is different. A financial expert might be able to help you decide what’s best for you. 

4. Don’t count on paid work

If you expect paid work to be part of your retirement income, Nuttall recommends having a contingency plan.

“Many people assume that they will be able to easily find paid work in retirement, with around 80% of pre-retirees believing they will work for pay,” Nuttall explains. “In practice, it appears to be much harder, as only 28% of retirees report doing paid work.”

If you’re being forced into early retirement but aren’t ready to stop working, you can learn more about where you might find work during the COVID-19 pandemic.

Unexpected retirement can be a source of financial anxiety. But having a solid plan in place can help you reduce any impact early retirement might have on your mental health. 

Combined with a plan, a bit of optimism can help too. Nuttall cautions that having an overly conservative, pessimistic view of your financial future can become a self-fulfilling prophecy. 

“Concerns about declining personal financial well-being also become overstated as adults age,” Nuttall says. “We find that wealth and investments generally grow in value as people age.”

Even if it arrived earlier than expected, planning ahead and thinking critically about your retirement can help you enjoy it. After all, you’ve earned it.