Most of us plan for our retirement in some form or another. While the vast majority of us don’t plan for that period of our life in terms of our finances sufficiently, we do at least consider what it will look like, when it will start, what we will do, and more. Sometimes, however, there are reasons as to why we need to retire early. This means retirement, regardless of all your planning (financial and otherwise), takes you by complete surprise.
Chances of Retiring Unexpectedly
Various studies have shown that this happens more often than people actually realize. In fact, we now know that at least 60% of those who are retired, did so at a completely unexpected time. A different study has demonstrated that at least 50% of people retire before they thought they would, often because of health reasons. This can be their own ill health, or that of a family member who they have to care for. Alternatively, they can be made redundant, or their skills may no longer be relevant at work.
What to Do
So what happens when you suddenly have to retire, perhaps years before you had intended to? While you may feel like you have to figure out exactly where you are going now, the official advice is that you should start by understanding exactly where you are now. Create an inventory of your personal financial situation. There are six things to consider in particular: your debts, the interest you pay on the debts, your assets, your cash flow or income, your expenses, and what you spend your money on and how important each of those things are. This exercise is not about making decisions, it is about painting a picture of what you currently have. Once you have that picture of where you are now, you can start figuring out where you are going.
What About Funding?
Now that you have your personal financial situation in front of you, you can see whether or not your assets and incomes are sufficient to cover your debts, interests, and expenses. This means that you have to first take a much closer look at what your income actually is. In an ideal world, you wouldn’t have to make any changes to how your money is spent, which is why you need to start by what you’ve got coming in. Start by looking at the different retirement accounts you have, and how much is in there. Multiply that balance by 4%, as that is the amount that you should be able to withdraw yearly if you want to make it last for 30 years. You need to add this to the amount of pension income you receive each year, if you get any at all, as well as to the amount of Social Security you will receive each year. Remember that if you can postpone taking your Social Security benefits, the amount you actually get will increase by 8% for every year you wait, up to the age of 70. This means that, if you can delay it, you are making a positive financial decision.
How to Manage the Shortfall
It is highly likely that your income is not enough to cover your cost of living. To deal with this, you have to either spend less, or you have to earn more. Downsizing, and therefore spending less, is the best way to approach this. Consider moving home, going somewhere where the cost of living is lower. After all, you are no longer geographically bound to your work, so you can live wherever you want.
Secondly, if you have had to retire early unexpectedly, it is likely that you can still work a little bit. Try to find a part time job that fits around your new needs and requirements. The exception is if you have to stop working because of your own ill health, but it is likely that you will be eligible for different benefits at that point, which should also help you close the gap.
Last but not least, be prepared. Every once in a while, run an exercise to see how you would fare should you have to face unexpected retirement. In so doing, you will also be able to see where you need to make the greatest changes. For instance, you could start paying off certain debts, or move them over to plans with lower interest rates. Proper preparation, as they say, prevents poor performance, and if you know what could be coming, you will find it much less stressful if it does happen.