Success with an Unplanned Early Retirement



Your success in retirement revolves around the date you select to retire. This date, however, is not set in stone. Retiring early is a dream for many Americans. Yet, that dream can become a nightmare. For unprepared people in their 50s and early 60s.


What’s Happening Now?

Unfortunately, forced retirement has become commonplace.  Almost half of current retirees say they quit work earlier than planned—the result of job loss or health problems. Many are being forced into choosing early retirement.


Your tax plans and retirement planning needs and assumptions need to be completely re-assessed when you have a planned early retirement or have an unexpected early retirement.


How Long Will Your Money Last?

You will need to take stock of your financial situation. Determine how an un-expected early retirement change will affect your lifetime retirement income --from your retirement plan withdrawals, your savings, and your taxable assets. The average lifespan is currently into your 80s. There will be an extra-long period to rely on your assets and income to support you if you retire in your 50s or early 60s


Special Tax and Income Challenges for Early Retirees.

A retirement before age 59½ creates income challenges for the early retiree.  The main impact for the early retiree is not yet eligible to receive retirement benefits from Social Security or most pension plans.


Do You Have an Income Gap?


Collecting your social security income or pension income at an early age is a tempting source of income for early retirees. However, you need to evaluate the impact of early withdrawals verses starting later. Get professional advice of about different tax and income impacts for different benefit starting dates.


The decision to wait to start social security will usually result in one to two hundred thousand dollars additional money over a joint lifetime.  This decision is a critical one considering universal worries about running out of money during retirement, and longer life spans- especially for women.


Most retirees has most of their assets in a retirement plan through a 401(k) plan, or a 403(b), or pension   at his or her employer, or in an individual retirement arrangement (IRA).


Strategy to Avoid High Taxation

To avoid large taxation, early retirees will be going first to cash and savings accounts & other liquid assets, and avoid accounts that will generate additional taxes, or early withdrawals penalties, or borrowing costs.


Then, many retires will consider other assets such as taxable assets or Roth IRA accounts. Finally, retirees will start withdrawing taxable retirement account proceeds




What Financial Changes Need to be Considered?


At retirement time, you need to review your Investment accounts. Keep an eye out for investment rebalancing opportunities. Portfolios may be out of balance for the risks of high taxation or high investment risks.


You should review and update your tolerance for investment risks. Your risk level will be different now that you are retired and de-cumulating and drawing down on your funds. Determine what amount of assets you want to risk losing while you are seeking growth.


Should Spending Plans be Changed?


You will need to re-evaluate your spending habits and your current standard of living. You should re-examine your expense assumptions. Look for ways to cut spending or boost income for longer retirement periods


No one likes to reduce their income, even if you have more assets. No matter your level of affluence, you need to be some revising of your financial and spending goals


Retirement Plans- Special Considerations


Traditional IRA and 401k and other retirement plans can be tapped if no other options for cash are available.


An important tax issues needs to be considered.  The withdrawals of retirement plan earnings and pre-tax contributions are subject to ordinary income tax.


Younger retirees may be subject to the 10% early withdrawal penalty tax on distributions taken from retirement accounts before reaching age 59½.  However, there are a couple of exceptions. Young retirees who take a series of substantially equal periodic payments from an IRA are not subject to the 10% additional tax under strict “Substantially Equal Periodic Payments (SEPP)” rules.


Take These Steps


You need to review your retirement situation, your retirement income review & your tax situation. Your review of your entire retirement income strategy will answer the question as to whether your nest egg will last as long as you do. If not, dramatic changes are required.


Contact us if you need help to determine the tax consequences of early retirement, or to evaluate the adequacy of your retirement income or social security income. Contact Harvey Weinstein, at 860-778-8168