Forced To Retire Early? 4 Mistakes You Should Avoid
Nobody wants to be forced to retire early. Unfortunately, things don’t always go as planned and external factors such as layoffs and health concerns might make the decision for you.
Further complicating this issue, inflation and high interest rates have put retirement in the backseat for many Americans — something that will hit early forced retirees the hardest and worsen the gap between savings and target retirement income.
An Allianz survey, for example, recently noted that 40% of Americans say they don’t have a financial plan for retirement and will just figure it out when they get there, while 56% don’t know where to start planning beyond having a basic retirement account like a 401(k) or IRA.
Yet, experts note that there are also several steps these early and forced retirees should try to avoid, if possible, to preserve their financial well-being.
Claiming Social Security Too Early
While claiming Social Security early might be appropriate for some, in many instances delaying Social Security even a few years, or until full Social Security, is beneficial.
“Waiting to claim your Social Security benefit results in an 8% increase in your benefit each year,” said T.J. Williams, financial advisor and regional vice president at Wealth Enhancement Group.
Full retirement age (FRA) is 67 for those attaining age 62 in 2023, according to the Social Security Administration.
However, even after reaching FRA, you will receive “delayed retirement credits” for each month you delay filing for your benefits, and there is no additional benefit increase for delay after age 70, Williams said.
Those who are in a pre-Social-Security age bucket are going to need to completely revise their budget, said Andrew Crowell, financial advisor and vice chairman of wealth management at D.A. Davidson. They might need to find supplemental income sources, he said.
Raiding Your 401(k) or IRA Without a Game Plan
Accumulating wealth is one part of the puzzle of long-term financial security, and the distribution or income phase of retirement is by far the most neglected and most critical part of long-term financial health, Williams said.
In turn, knowing which accounts to pull resources from — IRA, Roth IRA, savings, equity within the home or insurances — and at which levels each year, as well as understanding the tax, market and long-term effects, is critical to long term health.
“For example,” Williams said, “in a year in which you had full employment, your income may be higher than in future years. Pulling 100% of needed resources from a traditional IRA may increase your taxable income more than necessary compared to other available assets. Working with a professional to design a tax-efficient distribution plan can dramatically increase the likelihood of long-term success.”
Taking On More Debt
Experts agree that now, more than ever, is not the time to accumulate more debt — especially in this high-rate environment. Without any income, your goal should be to reduce expenses that can work against you.
For example, for the week ending June 7, the average credit card interest rate was 20.69%, according to Creditcards.com. That can further put a dent in finances.
“The more debt you take out on a high-interest rate credit card, for example,” Williams said, “the higher the monthly interest expense. A situation like this can snowball out of control quickly if not managed properly.”
Making Emotional Decisions Regarding Investments
The sudden lack of employment might trigger some to make rash or emotional financial decisions, which can have detrimental long-term consequences.
“Be mindful that decisions do have repercussions,” Williams said, “and, depending on the type of account (outside of IRAs), tax consequences may arise based on the sale of investments.”
Williams added that another common theme is FOMO, and many take the stance that they need to “catch up” or that they need to invest to make sure they have enough later in life.
“This action without a plan often causes an emotional roller coaster,” Williams said, “as the … investment was based on emotion and not a fundamental plan.”
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