Surprise Early Retirement: Why It's Trending and How To Prepare for It Now - Understanding the Factors of Production: Key Elements in Finance

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The average retirement age in the U.S. is 62 years old, according to Mass Mutual, but not everyone waits that long to retire. Sometimes, even people who are willing to work until later in life end up retiring early due to unforeseen factors.

According to CNBC, 46% of people retire early because of health reasons. The other two most common factors are employment issues (43%) and family issues (20%). Only about one in five people retire early because they’re financially stable.

While retiring early is often the dream, being forced into retirement is another story if you’re not financially prepared. Here’s the impact a surprise early retirement can have on people and how to prepare yourself financially ahead of time.

Surprise Early Retirement Can Be Financially Detrimental

Even those who initially want to retire early aren’t always in a position to do so. So, when it happens due to factors beyond their control, it can lead to some serious financial complications.

As cited by CNBC, Catherine Collinson, President and CEO of Transamerica Institute and Transamerica Center for Retirement Studies, said the following regarding early retirement:

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“Many people may not even realize how severe the consequences can be and how absolutely critical those extra five or 10 years in the workforce can be in terms of achieving retirement security.”

Even if you only take Social Security into consideration, waiting a little longer to retire can have a major impact on your monthly income. The earliest someone can claim their full Social Security benefits is 66 or 67, depending on your date of birth. Waiting until 70, however, means getting the highest benefit amount possible. Meanwhile, claiming benefits before the full retirement age could be the difference of hundreds of dollars a month — if not more.

And it’s not just that. Retiring early means losing years of potential income and time when investments could have kept growing. But it also means losing out on certain employer-sponsored retirement benefits, like matching 401(k) plan contributions.

Facing Early Retirement: Here’s What To Do

If you’re worried about the possibility of a surprise early retirement, there are some things you can do to prepare yourself ahead of time.

One option is to simply look into ways to keep working for a few more years. This could mean brushing up on your technical skills or expanding your professional social network. It could also mean keeping up to date with job education or related skills that keep you ahead of the competition and a sought-after asset to any team.

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It’s also important to evaluate your health now and as you get older. You might not be able to control everything that happens in your life, but keeping up with nutrition and exercise can definitely help if the goal is to keep working and live a long, healthy life.

If you’ve already been forced into an early retirement, try not to stress. Instead, take a moment to assess and reset your financial goals. Create a new financial plan, either on your own or with a professional, that minimizes the risk of running out of money in your later years.

In terms of ensuring as much financial stability as possible, you may also want to do the following:

Consider whether or not moving or downsizing your home would make financial sense.
Assess your current taxes, including property and income tax. Ask yourself whether moving somewhere else is a better option for you.
Review your health insurance or COBRA plan rules to determine your coverage, premiums, and anything else that could impact you financially.

Follow the 4% Rule

One retirement planning strategy is the 4% rule which is where you can withdraw 4% of your investment and savings per year you’re retired (adjusted for inflation).

Say, for example, you have $1 million when you retire. You can safely withdraw $40,000 the first year without worrying about running out of money.

That amount of money can be withdrawn each consecutive year, as well. You’ll want to adjust how much you withdraw based on that year’s inflation levels. For instance, if the inflation rate is 3% in year 2, you’d withdraw $41,200. If it’s 2% in year 3, you’d withdraw $42,024 that year.

Of course, the 4% rule isn’t a perfect solution. But it can serve as a guideline if you’re trying to ensure you don’t run out of money in retirement.

If you want to shake up the old rule a bit, you could also get an annuity. You use some or all of your retirement money to buy a contract with a life insurance company. In turn, you get a steady paycheck every month for either a fixed period or the remainder of your life.

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