It’s natural to have dreams about the perfect moment when you step away from the job, entering retirement financially secured. But according to a recent study by the Center for Retirement Research (CRR), the timing of that last workday might come as a surprise.
The researchers tracked the ages of individuals of when they retired compared with when they expected to, based on surveys conducted over 20 years. Nearly 37% of those surveyed ended up retiring earlier than planned. Suffering a sudden health scare was the overwhelming cause.
Maximize your payments
Planning for the unknown is why you save for retirement. But protecting yourself when your plan gets upended because of poor health isn’t easy. There are tactics, though, that you can start implementing to ensure you’re secure if your retirement unexpectedly starts a few years early.
Plan on paying for health care
If you’re forced to retire before age 65, then you’ll have to pay for your own health-care plan. “The biggest expense besides a mortgage is health insurance,” warns Fred Taylor, president of Northstar Investment Advisors.
That is why Taylor suggests funding a health savings account (HSA). For those with a high-deductible family health plan, you’re eligible to contribute $7,000 a year, before taxes, into an HSA. The funds you contribute can grow in similar investments to your 401(k), and you can use the money any time for health expenses, tax-free. If you don’t use it, then the money continues to accumulate, growing tax-free until you need it.
You can also use HSA funds to pay your health insurance premiums at the beginning of retirement.
If you don’t have an HSA, then relying on your IRA might be another option. For instance, if you lose your job and are out of work for 12 weeks, collecting unemployment, then you can withdraw from an IRA to pay for health insurance premiums, without penalty. Typically, withdrawing early—before age 59½—from a traditional IRA comes with a 10% penalty.
Increase short-term savings as you age
There is a common rule of thumb for savers to sock away three to six months’ worth of living expenses, to be prepared in the case of an unexpected job loss or another emergency. After all, you don’t want to tap retirement funds to cover expenses when you’re 35.
But as you age, “ratchet up that rainy day bucket,” says Joseph Eschleman, president of Towerpoint Wealth. Having more savings can come in especially handy if a health issue forces early retirement or if a job hunt is taking longer than expected.
Many financial planners say you should aim to have a year’s worth of emergency savings at the time of retirement, to cover any initial expenses right as you lose your paycheck. By doing so, you can avoid selling your house or stripping retirement accounts too early simply out of fear.
Delay Social Security, if you can
The longer you hold off on declaring Social Security, the better. Take someone born in 1959, for example, who earned a $1,500 monthly Social Security payment upon official retirement age of 66 and 10 months, based on their lifetime salary. By waiting until age 70 to declare, the monthly check would come in 25.3% higher to $1,879.50. But when opting into Social Security at 62, those checks would come in at just $1,062.
Clients that suffer a health shock often ask Taylor to tap Social Security early since they believe they will die soon. Even if true—not that it is often that predictable—you still may want to wait. If you have a spouse over 60 that made less than you, when you pass away they can opt into your Social Security payment, collecting the higher amount.
It can serve as another outlet to help your spouse, even if your health fails.
|For more news you can use to help guide your financial life, visit our Insights page.|