Will COVID-19 Force You into an Early Retirement?
By: BILL STORDAHL, CFP®
The coronavirus pandemic has disrupted the financial plans of many American workers. Millions from a broad swath of sectors have been affected, with many losing their jobs, taking pay cuts, or otherwise worrying if their employers will be able to stay in business. You might be facing a situation like this, and you may even be considering early retirement because of COVID-19.
Your decision will depend on factors that include your age, financial readiness, job availability, and life goals. For example, if you were planning to retire within a few years and are well set for financial independence, you might decide to retire early rather than undergoing the job search process for a position you would not hold long anyway.
To assess whether you can enter into early retirement, consider the following factors:
Retirement Savings
Retirement at any age requires financial preparation. Retiring early means you are shaving off at least a couple of years that you would have been working—and saving.
Do you have enough in savings, retirement accounts, and other income sources to make up for that loss? You will need a solid retirement plan to draw enough income without worrying about running out of money.
A financial planner can be helpful here to help you understand your financial situation. At the least, you can use retirement planning calculators to help determine whether you are on track. And if you’re not, you can start problem-solving, such as cutting expenses or returning to the workforce full or part time.
Health Coverage
Without employment, you will need to find health care coverage if you haven’t yet reached age 65, when you become eligible for Medicare.
Your options may include keeping your current plan through COBRA. However, this can be expensive, especially if your ex-employer doesn’t subsidize the coverage. If you’re married and your spouse is still working, then consider getting on their employer-provided plan.
If neither of these is an option, then look for affordable coverage through a private insurer or the public marketplace. You may cut back on discretionary expenses, if need be, to pay for coverage until you are eligible for Medicare.
You may feel tempted to avoid health care coverage altogether, but this is risky. As COVID-19 has shown, we cannot predict the future. We caution against using this approach.
Social Security Benefits
Your Social Security benefits will likely be an integral part of your income in retirement. With early retirement, you may be tempted to start receiving Social Security as soon as you are eligible at age 62. However, keep in mind that the earlier you claim benefits, the less you will receive, and that benefit amount will apply for the rest of your life (though cost-of-living adjustments will increase the amount over time).
If possible, delay claiming Social Security until you are “full retirement age,” which is between 66 and 67, depending on the year you were born. You may want to delay Social Security until 70, when you will receive maximum benefits. Your ultimate decision will depend on factors such as income needs and expected longevity.
You can use a retirement calculator by the Social Security Administration to help understand the role that benefits will play in your early retirement plans.
Other Financial Factors
Here are other factors that can help you decide whether you can join the ranks of early retirees without fear of running out of money:
Taxes: You want tax flexibility in retirement so you can help stay in the lowest tax bracket as possible. Having retirement plan accounts that you can take tax-free distributions from, such as Roth IRAs, can help. If you don’t have a tax-free retirement income bucket, consider creating one, such as through an IRA conversion to a Roth IRA.
Debt: Debt has its uses, but too much can sink your plans for early retirement. Carefully look at your debt level to determine whether it makes retiring early risky. Cut back on your credit card spending, and consider whether refinancing will help make debt more manageable.
Life Goals
In addition to the financial issues, the decision around whether to enter an early retirement depends on your life goals. If you envision a leisurely retirement, you may find an early retirement incompatible if you haven’t saved enough. You may find yourself worried about running out of money or cutting back expenses to make sure the money lasts—hardly the comfortable retirement you envisioned!
So carefully consider your goals for retirement, including your desire and ability to keep working, dreams and goals, income and expenses, residence location, and cost of living. And make sure to discuss your plans with your spouse so you are on the same page.
We also recommend that you consider talking with a financial advisor who provides retirement planning. Our fee-only financial planning firm in Greenwood Village, CO, helps clients determine the feasibility of their changing retirement objectives as part of our work with them. We suggest you look for a fee-only, fiduciary financial advisor so that you know the recommendations you receive are in your best interest.
Discuss your situation with a fee-only financial advisor. Schedule a complimentary discovery call.
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