Sudden Retirement – Now What?
You weren’t planning to retire yet, and you certainly didn’t see it coming, but it’s here, and you may not have a say in the matter. Whether you were laid off or you received an offer with a severance package, facing sudden retirement can be a confusing and stressful time.
If this is happening to you, you’re probably wondering what you should do next. In this post, we’re going to help you cope with sudden retirement by taking a closer look at ways to handle the situation and plan for the next phase of your life.
The first steps when faced with sudden retirement
Unplanned retirement is more common than you might think. Even before CVOID-19 swept across the world, people faced sudden retirement. Fortunately, sudden retirement is something that you can get through with the right planning.
One of the first steps to make this process go as smoothly as possible is to understand your current situation. Where do you stand financially? It’s time to get clear on your expenses and familiarize yourself with your options. You may discover that you do not necessarily need to retire after all. You could find another job or transition to a part-time job if you prefer.
Having someone to talk to is the best way forward because from there, you can come up with a game plan. It’s a fluid process that you can work through to find the right option, whether you want to continue working elsewhere or retire earlier than expected.
Two stories about sudden retirement
If you receive a severance package, you need to plan how you will use it wisely. When clients come to us with concerns about sudden retirement, we give them peace of mind by helping them work through their options. We use software that runs various “what if” scenarios that allow us to walk through potential situations and outcomes.
We have a 60-year-old client who recently approached us after learning that the corporation she worked for had offered her early retirement. She had a one-year severance package, and she could either take it as a lump sum or split it over a few years. Thankfully, she also had some savings and a 401(k).
However, she was still unsure about how to press forward. After all, she wasn’t planning on retiring early. So, we started to go through some ‘what if’ situations with her. We asked her whether she wanted to continue working elsewhere or not. She said that she wasn’t sure, but she could potentially do some consulting. She also considered pursuing a new job with a different organization. As you can see, she had some excellent options available.
We also had a client who had been laid off and received a short severance package. He didn’t see any possibility of getting hired elsewhere because of his age. He noticed that younger people were getting hired, and they were getting paid less than him, so why would someone want to hire him instead?
So, finding another job in the same industry wasn’t an option for him. However, he always loved fishing and boating. He talked about wanting to work for a bait and tackle store, and he pursued that pathway despite the fact it meant taking a massive pay cut. He didn’t care, though, because he was finally doing something that he loved. It kept him busy, and he enjoyed it.
These examples of two people facing sudden retirement show that you can either panic about the situation or treat it as an opportunity—an opportunity to pursue a new career path and to do something that you’ve always wanted to.
What should you do with your severance package?
Many companies offer severance packages. But they tend not to pay it out weekly or monthly like they usually would with your paycheck. Instead, they give it to you as a lump sum. Other companies may give you the option to take the severance package as a lump sum or to take some of it now and the rest later in the year.
So, what should you do with your severance package?
What you do with your severance is entirely your decision. However, we often recommend that you spread it out over a couple of years. The number one reason for spreading it out is because of taxes. If you have made a lot of your income for the year, throwing another year’s worth of income on top can increase your taxes. Spreading the severance package will help to spread the tax burden.
We use software to analyze this situation so that you can see whether it’s worth spreading your severance package over a couple of years. In the end, the decision lies with you. However, it is worth taking the time to think about what you want to do before deciding.
Plan your finances
Putting together a retirement income plan is so important because it shows you what you have to spend. Of course, planning your finances can be difficult when you feel rushed and under pressure due to sudden retirement. So, we’re going to take another look at our client’s story to help you see how this type of situation can play out.
Our client was a 60-year-old executive who has worked all of her life. She contributed to her 401(k), which came to around $1.5 million, a comfortable number to work with. We knew she had money, so it was a case of going through options with her. She had some company stock and investments that came to $450,000, which meant she had almost $2 million in working capital.
Once we knew how much she would have in retirement, we had to consider her spending habits and financial obligations. This is essential because your spending tells you how much you will have to live off once the severance runs out. After doing the calculations, we discovered she was spending around $8,000 per month.
When you calculate your spending, you do not need to know where every dollar is going. We like to break spending down into different categories to help make progress easier for the client to understand. So, we work out the bulk number, and we also consider any fixed expenses that may be obsolete at a certain point in time. For example, will your mortgage be paid off in the next few years? It would help if you thought about these types of expenses when planning your finances for retirement.
As we mentioned, our client was considering doing some consulting to generate an extra income stream for herself. We needed to know how much she estimated to make and how long she thought she could do it. She estimated that she could potentially generate around $100,000 a year and that she would keep it up for a few years. When we were going through the scenario and planning, we reduced the $100,000 to about 75%. We prefer to be conservative in case she couldn’t reach the estimated $100,000.
Consider social security and health insurance
Since our client is 60, the next big question for her was around social security. Should she live off her own money until retirement, or should she start considering social security? Although her forecast for her consulting services looks good, there’s always the chance that things don’t work out.
This is where our software can help clarify the situation. The software shows the real value of taking social security early or waiting. If you focus solely on the numbers and think about how you can get the most money from social security, sources will always advise you to wait until you are 70. However, like with most things in life, there are situations where taking social security early is a good thing, and there are also times when you should wait.
Another concern our client had was health insurance. She was facing sudden retirement at the age of 60, and if she continues to consult, she needs to cover her health insurance until she is 65. Health insurance will likely cost her over $1,000 per month, which is a considerable expense and something she needs to plan for. Since she owns two homes, she understands that she may need to sell one of the homes should the consulting not work out as planned. Selling one of the houses will help to increase her equity and keep her expenses down overall.
Seek help from a financial advisor
If people face sudden retirement, they usually don’t think about what they will do next straight away. In the beginning, they’re busy thinking about how this could even happen to them in the first place. Many people work for the same company for years when they’re blindsided with sudden retirement, and they have to recover from that initial shock before they can get the ball rolling and start planning accordingly.
When clients come to us who have been laid off or forced into early retirement, we always show them the numbers and the possibilities. We help them see the light at the end of the tunnel. Yes, they are suddenly retired, and that brings about a lot of stress and confusion. However, there are options, and we help our clients see those options for themselves, which helps to ease their minds.
You do not have to handle sudden retirement alone. Talk to someone such as a financial advisor, who can help walk you through things objectively and plan for your retirement.
Not sure how to plan for sudden retirement?
We can help! You can book a complimentary 15-minute call with a member of our team to help you cope and plan for sudden retirement! Book your call today to get started!