What to Expect With Unexpected Early Retirement

Considerations for participants when retirement comes earlier than anticipated.

Art by Suharu Ogawa

Many workers anticipate retiring at or around age 65, when retirement traditionally begins. Some believe they will work longer than that, and others shorter.

Importantly, research shows the timing of when many people enter retirement is not completely in their own control. In a recent survey conducted by NerdWallet, the company found more than one-third of American retirees said it was not their personal choice to leave the workforce. While the number is less than half of respondents, it still represents a sizable portion of participants forced to retire due to unforeseen circumstances.

According to NerdWallet, 18% had to leave because their health negatively impacted their ability to work, while 9% simply lost their job and could not find another. Not explored as a reason in the survey but also another issue is leaving the workforce to care for a loved one battling physical or mental illness, whether it’s a family member, significant other, or a child.

“Illness can be debilitating, not just for the person who gets sick, but on the primary partner of that person, too,” says Harris Nydick, founding partner and managing member of CFS Investment Advisory Services. “It’s difficult to keep a career going and trying to keep your spouse or a significant other going too.”

Considerations in Early Retirement

If a worker finds themselves needing to take retirement early on, there are concerns to understand going forward. The first is how to best begin withdrawing savings from a 401(k) or individual retirement account (IRA). If participants younger than 59 1/2 draw from these tax-qualified savings accounts without meeting certain disability requirements or obtaining another exception, there will be an automatic 10% penalty tax assessed on top of any normal income taxes.  

Another matter is how to best time Social Security. Delaying these checks until age 67 is often ideal, as workers will lose a percentage of their benefit each year it is claimed earlier. If an individual begins making their claims at age 62, generally the earliest eligible age to begin taking Social Security, this can result in substantially reduced benefits—with monthly payments falling by as much as 30%, according to the Social Security Administration. If participants delay their claim however, their benefits will increase 8% a year until age 70, says Arielle O’Shea, investing and retirement specialist at NerdWallet.

“It pays, quite literally, to delay taking your benefits,” she recommends. “But, if you’re forced into early retirement and you have no other way to make ends meet, early claiming of Social Security is an option.”

One tip O’Shea adds is if participants do end up back on their feet or no longer need to claim Social Security after taking a reduced benefit early, they can suspend the benefit once they reach age 67 until age 70. Doing this can increase their checks by 8%.

Another matter is the issue of maintaining health insurance coverage. Some generous employers may offer continuing coverage until Medicare eligibility, depending on the terms of the employees’ separation. But unfortunately many will not, or they may only provide coverage for a relatively short period.

If a retiree is the caregiver for a loved one, the cost of private health insurance with restricted savings is almost unattainable, says Nydick. Taking on part-time work, or moving towards contracting or consulting gigs, can assist with health insurance and even bring money to the household. Nydick mentions how some companies, such as Starbucks and Costco, offer health insurance and offer 401(k) benefits for part-time workers. Even if one does not generate as much income as they did in their established career, this path minimizes out-of-pocket costs.

If part-time work is not feasible, freelancing and consulting can generate substantial income while working from home or remotely, says Nydick. “If you can’t leave home, maybe you have the kind of skill set that allows you to have a consulting job, where most of your work is done via email, Zoom or Go-To Meeting,” he adds.

Conserving Can Make a Difference

As one would expect, O’Shea recommends early retirees take conservative approaches when withdrawing for their retirement accounts. This means more modest vacations and spending habits.

“Early retirees have to set a new budget,” Nydick advises. “Setting a new budget and setting new expectations are all things these people have to consider.”

“It can make sense to meet with a financial planner, but early retirees can also use a retirement withdrawal calculator to get a good estimate of how much they can spend annually,” O’Shea says.

Also important is investing savings appropriately. If a worker retires at age 60, they may still have 30 to 35 years of retirement in front of them, O’Shea notes. They will likely need to maintain some exposure to equity markets, if only to outpace inflation. Consulting a financial planner, or even a robo-adviser—which typically costs less than a planner and can still manage investments—is ideal.

“This might mean keeping a couple years’ worth of expenses in liquid accounts so you’re covered in the case of a market downturn, but investing the rest of your savings in a portfolio of stocks and bonds, heavily tilted toward the stock allocation,” O’Shea suggests.

Along with conserving money are coordinating personal budgets. Considering debt and income, these new retirees will have to arrange a new plan until additional benefits or money is set in.