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Retirement Planning > Spending in Retirement > Income Planning

Your Client Is Forced to Retire Early. What Should They Do?

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What You Need to Know

  • An emergency fund can provide breathing room while assessing the situation.
  • Securing health insurance on a spouse’s policy is often the cheapest and best option.
  • Clients may consider getting into consulting or starting a business.

Retirement planning is likely one of the main areas of focus in your work with clients. They rely on you to help them plan, save and invest for a comfortable retirement. In most cases, they likely have an age, or an age range, in mind to move forward into retirement.

Things don’t always go as planned. Sometimes, clients will face an unplanned early retirement due to a job loss, a medical situation or other unforeseen circumstances. If this happens later in their working years, between about 55 and 65, there are some key decisions to be made.

Here are several steps to best navigate this situation.

Emergency Fund

Part of ongoing planning should include maintaining a sufficient emergency fund. This will certainly not get clients through an unplanned retirement, but this money can provide some breathing room as they assess the initial impact of the situation and plan for the future.

Financial experts typically suggest having at least six months’ worth of normal expenses on hand in a liquid account. You can help your clients determine the amount that’s right for them.

Disability Coverage

While disability coverage may not solve a client’s financial needs on a permanent basis, having it in place can help ease the financial strain of a serious medical condition and provide some time to chart a new financial course.

Be sure to work with your clients to have appropriate coverage in place, either through their employer, a private disability policy or both as appropriate.

Retirement Savings and Investing

In the event of an unplanned retirement, having a solid base of retirement savings can be very helpful in guiding clients through the next steps in planning the rest of their life.

They will need help making any adjustments to their investment strategies as well as when and how to take distributions. This planning will also include helping clients decide when to claim Social Security, among other issues.

Assess the Overall Picture

In the event of an unplanned retirement, the first step is to sit down with the client and assess the overall financial situation. How well is the client positioned?

This will help both parties in charting the client’s next steps. Perhaps the client had planned to retire at age 63, and this occurred at 58. If your assessment indicates that the client is already in position to confidently move into retirement, that’s obviously a great outcome.

This assessment should look at clients’ potential sources of retirement income, including:

  • Balances in retirement accounts
  • Balances in taxable accounts
  • Any severance package offered by their employer
  • Any bonuses due from their employer
  • Income from a working spouse
  • Stock compensation from their employer such as stock options, restricted stock units and company stock
  • Balance in their HSA
  • Social Security at various ages
  • Annuities owned
  • Disability insurance benefits, if applicable

You should also review their expenses, including:

  • Housing
  • Ongoing living expenses
  • Health care

This assessment will help both sides determine if the client can shift into retirement or needs to find work if able. Retirement may entail scaling back a bit initially, while seeking employment might be because of a want rather than a need. Work at this stage might entail something on a scaled-down basis or even some sort of consulting or self-employment.

“Early retirement, especially for medical or caregiving reasons, can result in unexpected expenses or changes in income,” Says Devin Caroll, lead advisor and founder of Carroll Advisory Group. “This is the time to go back through the budget and adjust where needed, possibly reducing noncritical spending to ensure their core needs are met.”

Review an Exit Package

If your client lost a job, you will want to review any possible exit package from the employer. In some instances, companies offer incentives to get older, longer-tenured employees to take a buyout offer.

This type of enhanced exit package might include extended medical coverage, accelerated pension benefits or a lump-sum option if the company has a pension and accelerated vesting in stock-based compensation such as options, restricted stock units and related vehicles.

Whether or not the package is enhanced, it’s important that your client fully understands the terms to take advantage of all available benefits. This includes any severance pay.

Review Health Insurance Options

In some cases, companies may offer employees extended health insurance coverage as part of a buyout to incentivize them to take the package. This is not always the case in a layoff situation, Carroll says.

“Losing an employer’s health insurance can be a big concern,” he notes, “so they need to explore options like COBRA or the health insurance marketplace.”

COBRA extends coverage from the client’s employer, with the client paying the full monthly cost of their policy. This option is expensive and lasts only up to 18 months. If the client’s spouse is employed, getting coverage on the spouse’s policy is often the cheapest and best choice. 

The objective is to bridge the health insurance gap between losing employer coverage and becoming eligible for Medicare.

Look at Employment Options

Out of necessity or desire, clients might be interested in looking at their employment options. At this point, they may not be ready to retire even if they are financially able to do so.

They may have options beyond seeking regular, full-time employment. Depending on their experience and professional training, they may be able to get into consulting in their area of expertise or in related areas. Another option is starting a business, either within their area of expertise or in something unrelated. Encore careers are becoming more common for early retirees and others in this phase of life.

This option can be both a source of personal satisfaction for your clients and an economic bridge from their unplanned retirement to a more traditional full retirement age.

Develop a Revised Plan as Needed

Every client’s situation is different. If clients are faced with an unplanned early retirement, it’s vital that you examine their situation to determine if changes are needed to their planned distribution strategy, or if they need to scale back their plans for retirement.

“Since they might be tapping into their retirement savings a little sooner than expected, they need to take a fresh look at their investment strategy,” Caroll says. “Shifting from a growth focus to a more balanced approach can help manage risk and ensure they have stable income throughout retirement.” 

This can be a good time to help them determine if they need to seek employment for at least a few years to avoid tapping into their retirement funds and perhaps to continue adding to their nest egg and building their Social Security benefits.  

Image: Adobe Stock


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