What Happens When You Retire Earlier Than Planned?

When do I plan to retire?

This is one of the key questions most people consider when planning their financial futures. In fact, you probably set your retirement savings goals based on a specific target retirement date. You may also estimate your future Social Security benefit based on that date.

But what happens if things don’t work out as planned? If, say, you lose your job at 62 and can’t find another one despite planning to retire at 67? Or you have to stop work at 64 instead of 70 because your spouse has a health issue?

Many people find themselves forced into early retirement in scenarios like these. And if that happens, the consequences to their financial security can be very serious.

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Early retirement affects your finances in multiple ways

An unplanned early retirement can negatively impact your overall financial picture for many reasons. Specifically:

• You may be forced to claim Social Security sooner than planned if you need your benefits to cover the bills. This can result in early-filing penalties you weren’t expecting or missing out on delayed retirement credits you’d planned to earn. That can shrink your monthly benefit for life.
• You won’t have as long to save and invest in your 401(k) or other retirement plans.
• You may have to pay for expensive health insurance without an employer’s help until Medicare eligibility kicks in at 65.
• You’ll need to live on your savings for longer.

In short, you’re likely to have less money than anticipated, and you’ll need to rely on savings for longer.

What can you do if you’re forced to retire early?

If you find yourself facing unplanned early retirement, the most important thing is to react quickly.

Take a careful look at the money in your 401(k), IRA, and other retirement plans. Figure out how much you can withdraw at a safe withdrawal rate (perhaps by following the 4% rule) and then adjust your budget to stay within that number.

Depending on how much you can withdraw, see if you can live on your investments without claiming Social Security right away — at least until your full retirement age and ideally for longer to maximize this important income source.

If you discover you can’t comfortably live on the income you have from reasonable investment withdrawals and, if necessary, from Social Security, you may need to make drastic lifestyle changes.

Do this ASAP to preserve as much of your money as possible. After all, downsizing by choice to cash in equity and invest is much better than struggling to keep your house for years and draining your accounts, only to end up forced by your financial circumstances to leave anyway.

You can still salvage your retirement if you ensure you’re living within your means — especially if you act fast.

How can you be prepared if this happens to you?

Of course, it’s not fun to see your planned retirement dreams disappear. The best way to avoid this is to base your savings goals around an early retirement. Aim to make sure you have enough invested by, say, age 60 or 62, even if you hope to work longer.

That way, you’ll know your needs will be met if you can’t work as long as you planned. It will require more sacrifice while you’re working, but a lot less if you’re forced out of your job in your early 60s and you’re totally unprepared.

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