The COVID-19 pandemic and subsequent recession have put 4.2 million Americans out of work for 27 weeks or more. For adults in their 50s and 60s who were already nearing the end of their careers, retiring early may seem easier than competing with younger candidates in an increasingly competitive job market. But when it comes to retirement, you always have to think about the long game. Retiring early has its perks, but it can also lead to a dangerous financial shortfall if you're not prepared for it.
Why retiring early might not be a smart idea
When you retire earlier than planned, you have to make fewer dollars cover more years of expenses. You must reduce your annual retirement spending or you'll run out of money early, and if your budget only covered the basics to begin with, you're in trouble.
You may decide to start Social Security early to help you cover some of your extra costs, but this could actually make your financial problems worse. Claiming Social Security before your full retirement age (FRA) reduces the size of your monthly checks. For seniors who live into their mid-80s or beyond, it could also reduce their lifetime benefit, potentially costing them hundreds of thousands of dollars over the course of their retirement.
And when you finally run out of money? Then you have to depend on family members and friends to get you by. That can make it more difficult for them to care for their families and save for their own retirement, setting up a vicious cycle.
That's not to say early retirement is always doomed to fail. If you have enough money to cover your bills for the extra years, you may not have any problems. But if you're worried about running out of money prematurely, you should explore some of the options below before you decide to retire early.
Alternatives to early retirement
Ideally, you'd be able to find another full-time job where you made as much or more than you used to, so you could continue to save and retire on your original timeline. But that's not possible for a lot of people right now. So you have to do the next-best thing. Look for work and try to find any job that will provide you a steady source of income for now until you can either afford your retirement or find something better.
The federal government is still offering Pandemic Unemployment Assistance (PUA) through Sept. 6, 2021, so if you can't find a job, you can rely on this to cover some of your expenses for the next several months. You should also look into state and local programs that may be available to help those who are unable to find work due to the pandemic.
Even if these things don't pay for all of your expenses, they can reduce the amount you must withdraw from your retirement savings to cover the rest. That'll help your nest egg last a little bit longer.
Things to consider if you do retire early
If you have no other choice but to rely upon your retirement savings, you need to take a hard look at your retirement budget. Trips you may have wanted to take and big-ticket items you planned to purchase in happier days may no longer be possible because your savings now has to cover more years of bills. Consider reducing your retirement account withdrawal rate and looking for other ways to reduce your expenses, like refinancing your home.
You also need to think about how you're going to finance your retirement if you're under 59 1/2. Normally, there's a 10% early withdrawal penalty for taking money out of your retirement accounts under this age, but there are a few ways around it.
The Rule of 55 allows you to take penalty-free withdrawals starting in the year you turn 55 (or 50 for public service employees) if you quit or were laid off or fired from your job, but only from the retirement account associated with your most recent employer.
You can also make Substantially Equal Periodic Payments (SEPPs). This is where you withdraw equal amounts from your retirement accounts for at least five years or until you turn 59 1/2, whichever is later.
Finally, you can rely upon sources the government won't penalize you for using. Roth IRA contributions are always yours to take out penalty-free whenever you want because you already paid taxes on them in the year you made them. However, the same isn't true for Roth IRA earnings or conversions. You could also rely upon money you stashed in a taxable brokerage account if you have one of those. These aren't retirement accounts, so they're not subject to the 59 1/2 limitation.
In a perfect world, you'd be able to afford your retirement easily, but that's just not reality for most people. And in times like these, you have to be willing to adjust your plans on the fly. But that doesn't mean making rash decisions that will come back to haunt you later. You still need to weigh all your options carefully and try to lay off your retirement savings as long as you can to give yourself the best shot at a financially secure future.
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