Even before the pandemic created widespread job loss, a change in health was already a potential shock that could lead to someone retiring earlier than planned. The reasons could vary, from an individual’s own health to that of their close family member or friend. However, the COVID-19 outbreak adds an extra layer of challenge, especially for older workers.
- Accumulating several months of household expenses in an emergency fund is critical for people heading into retirement earlier than expected.
- Do a thorough financial accounting in order to get clarity and certainty on monthly expenses and how you’ll meet them.
- Claiming Social Security later generally results in a larger monthly benefit, but taking it early can make sense in some situations.
COVID-19 Accelerating Unemployment for Older Workers
The April 2020 jobs report showed rising unemployment among older workers, according to Richard W. Johnson, senior fellow and director of retirement policy at the Urban Institute. The monthly unemployment rate for ages 65 and older reached 15.6%, the highest level since records began in 1948. “Unlike previous recessions, this pandemic-led downturn has hit older workers especially hard and will likely create long-term employment challenges for them,” says Johnson.
Before COVID-19, 37% of Americans retired earlier than they had planned to, according to University of Michigan’s recent Health and Retirement Study, cited by the Center for Retirement Research at Boston College. “Although I haven’t seen any COVID-19 related studies, with the wide unemployment event that occurred, there is plenty of reason to believe this trend has been exacerbated in 2020,” says Sharon Duncan, a certified financial planner (CFP) with Selah Financial Services.
The amount of Americans who retired earlier than planned prior to the advent of COVID-19
Early Retirement Decreasing?
One can see Duncan’s point. Nevertheless, according to a poll by the brokerage firm Edward Jones and Age Wave, a consulting and research company, close to a third of Americans (29%) planning to retire say they now expect to do so later due to the COVID-19 pandemic, mainly for financial reasons. Further exacerbating the shortfall in savings, of those in this group who have adult children, 47 million, or about a quarter, have helped their offspring financially during the pandemic. The study was fielded May 21 through June 4, 2020, among more than 9,000 adults ages 18 and over in the U.S. and Canada.
“Additionally, job changes that lead to downsizing are another major contributor, and we’ve seen this occurring during COVID-19 as well,” says Duncan. COVID-19 has upended a lot of people’s plans. Brian Walsh, Jr., a financial planner at Walsh & Nicholson Financial Group in Wayne, Pa., frequently tells clients that retirement is an ongoing plan. “It is a living, breathing document,” he says. The best strategy, he believes, is to constantly monitor the plan to come up with different avenues, based on scenarios such as losing your job to COVID-19.
Here are some strategies to consider if you’re suddenly unemployed and thinking of retiring sooner than you originally planned—especially during a continuing pandemic that’s unprecedented in more than a century.
Save Up a Cash Cushion
Among the top tasks for someone scouting an early retirement should be a solid emergency fund, according to Alano Massi, a CFP and managing director of Palm Capital Management. “This should be the first goal of every family in terms of finances,” says Massi. “If both individuals in a household earn an income, the emergency fund should equal three months worth of household income.” The one-income household, he adds—whether it's a single person or a couple with only one income—should aim for a fund that equals at least six months’ worth of household income.
Massi advises to keep the funds in a savings or money market account, both of which allow quick and easy access. “Once the emergency fund has the recommended household minimum, then a separate account can be opened to invest longer term,” he says.
Calculate Your Monthly Expenses
It is imperative to create a budget. Start by calculating what you need each month, asking “what are your expenses, what are the goals you need to meet today and in the future,” says Walsh. Next, add up any assets and income, and see if you can delay Social Security or need to start now.
As soon as possible, get clarity and certainty on your financial needs and what you have to meet them, says Walsh. When people figure out how much they actually need, as opposed to imagining some unattainable, theoretical figure—$1 million or $2 million are common assumptions—it can bring some peace of mind.
It also allows people to plan more realistically. In the face of a job loss, people automatically think they’ll have to replace that job in order to achieve that number, says Walsh, but there is no no magic number. “The number they need to focus on is expenses and what income is needed to cover expenses on a monthly basis, plus a little extra,” he says, adding that most people don’t know what they’re spending or what they need to retire on.
People often have money outside what they’ve saved inside a 401(k) retirement plan. A list of other assets could include individual retirement accounts (IRAs), pensions from a former job, and post-tax brokerage accounts. “A financial checkup is just as important as a physical checkup,” notes Walsh.
Alternative Ways to Earn Income
In these times of working from home, do not let geography limit your job search, says Massi. “For example, contract your skills and services and combine them with technology by looking for jobs nationwide as a virtual training consultant, staffing agent, or any tech company hiring remotely.”
Consulting may be a good option, says Walsh. Companies may prefer this arrangement because not having to put someone on the payroll means saving on benefits. Individuals with a professional background may find these roles easier to come by than full-time work.
Starting at age 62, your Social Security benefit amount increases 8% a year if you elect not to take it, with the increase stopping once you reach 70.
When to Take Social Security
For many people, delaying Social Security benefits is the best strategy if they are under full retirement age, because of the difference in benefits: A person’s Social Security benefit automatically increases 8% every year beginning at age 62, for people born after 1943, as long as they haven’t begun claiming benefits. “That means that every month someone delays starting their Social Security checks is like having that money in the bank earning 8% interest,” says Duncan. The benefit increase stops when you reach age 70.
On the other hand, taking Social Security sooner than later might be a wise strategy. “When you have a black swan event, you have to adjust,” says Walsh. In a perfect world, delaying is the optimal strategy, but it might not be feasible in every situation. “Take it year by year,” advises Massi. “If you are between age 62 and your full retirement age and can earn more income than Social Security would provide, keep on working.”
One advantage of waiting to claim benefits, if possible: Once you reach full retirement age, you can work and earn as much as you want while still getting your full Social Security benefit amount. If you claim benefits below your full retirement age and earn income at the same time, some of your benefit payments during the year will be withheld if your earnings exceed certain dollar amounts.
A person or family needs another way to pay bills in order to delay taking Social Security, says Duncan. Some of the possibilities are earnings, savings, and windfalls, such as severance packages, or an inheritance.
When to Consider a HELOC
A home equity line of credit (HELOC) may be used to fund some basic needs if you are a homeowner, says Massi. This financial instrument has several advantages, not the least of which is that you don’t have to use it. A HELOC taps into the value of your home’s equity and works similarly to a credit card, but it usually has much lower interest rates.
Consultation With a Professional
More and more people look for planners to help them navigate this new reality, according to Walsh. Working with a retirement planning expert can help you establish several things, such as where you stand financially and whether you are in a position to retire. You may not need to go back to work. “People need to know they’re not alone,” says Walsh. Other resources, such as online tools and personal finance sites, can also help clarify your financial picture.