Financial Advisor in Raleigh NC: Unplanned Early Retirement

Retiring early can be a cherished aspiration for many individuals. Sometimes, things happen that make people retire early. This can be because of losing their job, the economy being uncertain, COVID-19, or health problems.

Retirement timing may not always be in your control. However, there are ways to handle your finances until you receive Social Security or return to work.

In the event that you experience an unplanned retirement as a result of a medical disability or layoff, follow the five steps provided below to evaluate your circumstances and explore potential income options. It is important to note that if you find yourself in this situation, as you will be making significant financial choices, it is advisable to seek guidance from a financial advisor before taking any actions.

Don't Leave Money on the Table

In the event of a layoff, you might receive a severance package that includes compensation equal to your previous salary and potentially extends your access to employer-provided health insurance and other benefits for a specific duration, ranging from weeks to months, or possibly even longer.

It's important to assess your eligibility for unemployment benefits if you intend to reenter the workforce. Typically, unemployment benefits commence once the severance period offered by your former employer ends.

If you possessed a 401(k) account or another retirement plan with your previous employer, many companies allow you to retain your savings in their plans as long as the account value exceeds $5,000. You can also move your money to an IRA, which might give you more options for investing.

Occasionally, employers offer stock grants to their employees, which can come in various forms and may be challenging to comprehend. If you leave your job, it's important to know what happens to your grants.

If you have restricted stock units, NSOs, or ISOs, you might lose them if you leave your job. You usually have three months to use them before they expire. It is always advisable to consult your plan documents for detailed information regarding termination and vesting procedures.

Examine your Budget

Analyze your financial situation by crunching the numbers to determine if your income can adequately cover your expenses. This entails assessing both short-term and long-term income prospects.

Begin by evaluating your essential and discretionary expenses and compare them to your income. Focus on scrutinizing your monthly expenses and objectively identify areas where you can make cuts. For instance, with more time available, you can reduce dining out expenses by cooking at home and consider scaling back on transportation, clothing, and other job-related necessities. Additionally, considering the rising popularity of cable and streaming services, trimming down or eliminating these subscriptions can help save some extra money.

Furthermore, consider exploring opportunities to generate additional income as a means to meet your financial obligations. Working part-time could be a viable option for mitigating budget shortfalls as you navigate your next steps.

Make Smart Use of your Assets

You may explore the option of generating income from your home, such as utilizing a home equity line of credit (HELOC), which can be repaid later from the proceeds of selling other assets. However, it's important to note that rising interest rates can have an impact on revolving debt, including HELOCs.

Another possibility is downsizing your residence. If you decide to sell and receive a significant sum of money, carefully consider the best utilization of that lump sum based on your personal circumstances and preferences. It's a good idea to consult with a financial advisor about this.

Formulate a Tax-Smart Strategy

In some cases, it may be necessary to tap into your retirement or personal savings. It is advisable to devise a strategic withdrawal strategy that takes into account your current tax bracket. This approach aims to minimize the impact of taxes and maximize the longevity of your savings by potentially stretching them further.

Traditional workplace savings plans and IRAs.

Typically, withdrawals from retirement accounts are subject to taxation as ordinary income. Additionally, there is generally a 10% early withdrawal penalty for distributions taken before reaching the age of 59½ for both IRAs and 401(k)s, unless you qualify for one of the exceptions outlined by the IRS.

However, if you are no longer employed by the company that sponsored your 401(k) plan and you left that employer at age 55 or older while maintaining the 401(k) account, you may benefit from the IRS's 55 Rule. This provision allows you to make early withdrawals from your 401(k) starting at age 55 without incurring a penalty.

Roth IRAs

If you have satisfied the 5-year aging requirement for your Roth IRA or Roth 401(k), any earnings distributed from these accounts are both tax-free and penalty-free. You get special treatment if you're 59½ or older, buy a home for the first time, or become disabled. It's important to note that you can always withdraw your after-tax contributions from these accounts without incurring any penalties and taxes.

Health Savings Accounts

You might have saved money in a Health Savings Account (HSA) from an old job. You can use this money to pay for doctor visits and other medical expenses now or later. It's a good way to save money on healthcare costs.

While HSAs typically cannot be used to pay for health insurance premiums, there are two significant exceptions to consider. The first exception is the ability to use HSA funds for paying COBRA continuation coverage, and the second exception allows for paying health plan premiums while receiving unemployment compensation.

Taxable Accounts including Mutual Funds and Brokerage Accounts

If you have to sell appreciated assets in these accounts to generate cash, it may result in capital gains taxes.

Understand your Healthcare Options

If you retire before 65 and don't have retiree coverage from your employer, getting healthcare coverage can be hard. You will likely need to evaluate various options, which may include your spouse's employer-provided plan, COBRA, a plan from the Affordable Care Act marketplace, or a private insurance plan. Making a decision among these choices can be a complex task.

Bottom Line

Facing a recent layoff or a medical disability can make the future seem daunting. However, it's important to remember that you still have viable options, even if you don't plan to return to full-time work. By collaborating with an advisor, you can develop a carefully crafted bridge strategy to smoothly navigate the transition from your career to retirement while optimizing your Social Security benefits. This thoughtful approach can provide you with the necessary support and guidance to make informed decisions about your financial future.

Sources:

https://www.fidelity.com/learning-center/personal-finance/retirement/unplanned-early-retirement

https://www.aarp.org/work/retirement-planning/info-2015/blindsided-by-retirement.html

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This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.