Investing
March 3, 2015

What Happens When You Have to Retire Early?

Simple. Thrifty. Living.

Most workers plan to work until age 66 or 67, but some find themselves unemployed too soon because of cutbacks, illnesses, or having to care for a family member. Many Americans find themselves facing retirement earlier than planned, so it makes sense to have a contingency plan in place just in case.

When faced with early retirement, people may look to the safety net Social Security payments can provide. This can be a huge mistake, because individuals who do this may be losing benefits they’d qualify for if they retire at age 66 or 67. In fact, monthly Social Security payments will be 25 percent less for those who retire early. Holding off on dipping into Social Security’s coffers until the age of 70 can help monthly payments add up to 32 percent more than they would be for someone who retires at the normal retirement age. An alternative to choosing to accept Social Security payments is to dip into savings or look for another job.

Unemployed people who are at least 55 years old won’t be penalized with an early distribution tax if they have to use funds from their retirement plans. However, these folks will have to pay income tax on funds received. Individuals don’t even have to retire permanently to take advantage of this perk. Early retirees can choose to work for another employer or even return to work for their former employer later on. The only qualification for this benefit is that early retirees have to be between the age of 55 to 59 and a half. Early distribution exceptions don’t apply to other types of retirement plans or IRAs.

Early retirement can pose significant health insurance issues for individuals who are not old enough to qualify for Medicare. Those who are lucky may be eligible for retiree medical coverage through their former employer or their spouse’s employer. Early retirees also may be able to purchase COBRA coverage from their former employer. This choice is usually expensive and only lasts about 18 months. Many individuals may want to avoid all of this and choose to obtain employment with a company that offers health insurance to employees.

Being forced into early retirement can be quite a shock for most people, especially when they’ve devoted many years to a company. It’s important not to panic when facing a situation like this. Early retirees may have to think creatively and reduce expenses, but many people have faced early retirement before and come through it financially intact. With a little planning and ingenuity, it’s possible to weather this without too much hassle.

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