What if retirement comes too soon?

For many older workers, their retirement "plan" is to keep working as long as possible. Unfortunately, life events often intervene and force people to retire sooner than they expected. This may result from job loss, illness, disability, caregiving responsibilities or some other reason.

This unanticipated situation can force people to make many decisions quickly and without a lot of forethought, leading to inappropriate choices. Retirees would be smart not to panic and take things one step at a time. If possible, you'll want to stay on track for eventually retiring when you had planned. 

You can find helpful guidance in a recent brief titled "When Retirement Comes Too Soon," part of the "Managing Retirement Decisions" series prepared by the Society of Actuaries (SOA). The brief reviews the various benefit programs that can provide income and necessary health insurance should you retire earlier than expected. 

To make the best choices, you'll want to balance potentially urgent short-term needs with longer-term retirement planning goals. For instance, older workers may find themselves tempted to dip into retirement resources right away, including:

• 401(k) plan accounts, which can be accessed without early payment penalties at age 59-1/2
• Pension benefits, if available, which can often be started at age 55, though early retirement reductions often apply
• Social Security income, which can be started as early as age 62, though significant early retirement reductions apply

If possible, it's wise to find other resources that can tide you over and help you avoid tapping these critical benefits too early. Doing so can significantly increase your ultimate retirement income, a beneficial result given the meager retirement resources of many older workers.

The SOA brief offers a list of potential short-term sources of income, including severance pay, early retirement incentives, unemployment insurance, worker's compensation and short-term disability insurance. These benefits can help bridge any income gaps you may experience while you're looking for new work and exploring all your options.

Note that it's common to be offered a severance or early-retirement incentive package and be asked to sign a waiver that you agree not to hold the employer liable for terminating your employment. Signing such a waiver is often a condition of receiving special termination or special early-retirement benefits. But you'll want to think carefully about whether it's in your best interests. The SOA brief provides more details on factors to consider in this regard.

Health care is essential

If you end up retiring earlier than expected, you'll want to make sure you can continue your employer-sponsored health insurance for yourself and your spouse, if you're married. Some severance or early-retirement incentive packages include extended health care coverage. Other possibilities discussed in the SOA brief include the following:

• Most employers are required to offer coverage known as COBRA, which allows you to continue your employer's insurance for up to 18 months after you terminate (in some situations, for as many as 36 months). Premiums under COBRA often cost much less than insurance you'd buy on the open market.
• You might be able to buy insurance on an exchange under the Affordable Care Act (ACA) and receive a subsidy, although this option may be in jeopardy with the potential repeal of the ACA.
• A few employers offer retiree medical insurance that can bridge coverage until age 65, when you're eligible for Medicare.

You'll want to spend time comparing the options that are available to you. Your analysis should include determining the amount of your monthly premium and assessing each plan's features, such as deductibles, co-payments and the provider network.

Preventative steps 

If you're an older worker in a vulnerable industry, or if you work for an organization that's struggling, you'll want to learn as much as possible about the above programs before you're laid off or offered an early-retirement incentive program. The same is true if you think you might need to leave work due to caregiving responsibilities or because of poor health. It helps to know what your options are so you don't need to make hasty decisions at a time that can be emotionally upsetting.

In addition, the SOA brief discusses the following preventative steps:

• Establish emergency funds
• Reduce or eliminate debt
• Update your job skills
• Network

The SOA brief ends with a helpful list of additional resources for learning about programs that can help you when retirement comes too soon.

With the uncertainties in today's economy, it's smart to take a hint about retirement planning from the Boy Scouts: Be prepared!