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Unplanned early retirement?

Key takeaways

  • Review your essential and discretionary expenses.
  • Make smart use of unemployment and savings, severance, or disability money.
  • Formulate a withdrawal strategy that is sensitive to tax considerations.

For some, retiring early is a dream. But for those faced with an unplanned early retirement—they are laid off late in their career, face a job loss related to the economy, or have a medical disability—it may be a different story, especially if you are not yet eligible to claim Social Security beginning at age 62.

Although you don't always have control over when you retire, there are ways to help bridge the gap between when your paycheck stops and when you start taking Social Security—or go back to work.

While you may be eligible to begin taking Social Security at age 62, it’s a decision that should be thought through carefully, even if you aren't working. Everyone’s situation is unique, but if you can swing delaying taking your Social Security, it can add up to 8% per year in increased payment amounts. Once you reach age 70, increases stop, so there is no benefit to waiting past age 70. Also, delaying your own Social Security may increase your spouse's survivor benefit.

Good to know: Your benefit amount could be reduced up to 30%, and your spouse’s benefits up to 35%, if you claim prior to your full retirement age.

If you find yourself unintentionally retired due to a medical disability or layoff, use the 5 key steps outlined below to assess your situation and income options. Then, take a look at a "bridge" strategy that may be able to help you keep your retirement on track. Important note: If you're in this situation, you'll be making significant financial decisions, and should consult with a financial advisor before doing anything.

Step 1: Don't leave money on the table

If you were laid off, you may be offered a severance package that pays your previous salary and could extend your employer’s health insurance and other benefits for a specified number of weeks, months, or even longer. “Since roughly half of retirements are unplanned, if your early retirement is due to a layoff, be sure to read all paperwork carefully,” says Meredith Stoddard, vice president of life events planning at Fidelity. Also consider whether you qualify for unemployment benefits if you plan to reenter the workforce. Do your research, though, as benefits vary from state to state and are tied to your most recent income. If you qualify for severance from your former employer, unemployment benefits will generally start after severance ends. If you had a 401(k) account or other retirement plan with your old employer, many companies will let you keep your savings in their plans once you leave, as long as the account value is above $5,000. You can also consider rolling the money over into an IRA, which can sometimes give you more investment options.

To learn more about rollover options, read Viewpoints: Considerations for an old 401(k).

Sometimes employers provide access to stock grants, which come in many shapes and sizes and can be complicated to understand. If this is you, it’s important to know what can happen to your award grants once you leave your employer. For example, if you were granted restricted stock units, or nonqualified stock options (NSOs) or incentive stock options (ISOs), in most cases, vesting stops once you’ve been terminated and you’ll have no more than 3 months to exercise your options. Always consult your plan documents for information on termination and vesting treatment.

Good to know: If your severance package is longer than that, don’t confuse the terms of your package with your stock option grants. There can also be significant tax implications to exercising your options as well.

You can find out more about employee stock plans in Viewpoints: 6 employee stock plan mistakes to avoid.

Step 2: Examine your budget

Run the numbers to understand whether you can generate enough income to cover your expenses. That means determining how much income you will have in the short term and in the long run.

Review your essential and discretionary expenses and then compare them to your income. Start by zeroing in on your monthly expenses. Scrutinize this information dispassionately and look for places to cut. For example, it may be easier to reduce costs for dining out now that you have more time to cook and you could cut back on transportation, clothing, and other items that were necessary for your job. Additionally, use of cable and streaming services have taken off in recent years, and they might be an obvious place to cut back and save a few extra dollars.

You can also think about whether generating more income is a path to help you to make ends meet. For some, working part time may be another way to reduce budget shortfalls as you consider next steps.

Step 3: Make smart use of your assets

You might consider generating income from your home, for example, with a home equity line of credit (HELOC) that you would later pay off from the sale of other assets. (Note: With interest rates still relatively high, it’s important to consider the impact on revolving debt, including HELOCs.) Perhaps you can downsize your residence. If you sell and receive a substantial amount of money, consider what might be the best use of the lump sum given your personal situation and preferences. Options could include using it to purchase a bond ladder or a period-certain annuity, which has a defined beginning and ending date, that can provide regular income until you start taking Social Security.

An unplanned retirement may result in changes to your time horizon, financial situation, and/or risk tolerance. You should review your asset allocation to ensure you’re invested appropriately considering changes to your circumstances.

Step 4: Formulate a tax-smart strategy

You may need to draw from your retirement or personal savings as well. Consider developing a strategic withdrawal strategy based on your tax bracket, that aims to help reduce the effects of taxes while helping to potentially stretch your savings.

  • Health savings accounts. You may have accumulated tax-advantaged money1 in an HSA from a previous employer that can be used to pay for a doctor's visit or other qualified medical expenses now or in the future. Although HSAs generally cannot be used to pay for health insurance premiums, there are 2 important exceptions: paying for COBRA continuation coverage and paying health plan premiums while receiving unemployment compensation.
  • Traditional workplace savings plans and IRAs. Withdrawals from these accounts are generally taxed as ordinary income. Also, a 10% early withdrawal penalty generally applies on distributions before age 59½ for IRAs and 401(k)s, unless you meet one of the IRS exceptions. If you no longer work for the company that provided the 401(k) plan and you left that employer at age 55 or later—but still maintain a 401(k) account—the 55 Rule is an IRS provision that allows you to take early withdrawals beginning at age 55 without a penalty. You should contact your plan administrator for rules governing your plan. For IRAs, you can avoid the early withdrawal penalty by arranging to take "substantially equal periodic payments," sometimes referred to as Rule 72(t) , from the account. The amounts of your withdrawals are based on your age and account balance, and you must take them for 5 years or until you reach age 59½, whichever is longer. Consult with a tax advisor if you are considering this strategy.
  • Roth IRAs. A distribution of earnings from a Roth IRA2 or Roth 401(k) is tax free and penalty free provided you have owned your Roth for 5 years (known as the 5-year aging requirement) and at least one of the following conditions is met: You reach age 59½, make a qualified first-time home purchase, become disabled, or die. You can always withdraw your after-tax contributions penalty-free and tax-free.
  • Taxable accounts, including mutual fund and brokerage accounts. If you have to sell appreciated assets in these accounts to generate cash, it may result in capital gains taxes.

Read Viewpoints on Tax-savvy withdrawals in retirement.

You can also estimate the potential effect of retirement income strategies on your taxes with Fidelity's Retirement strategies tax estimator.

Step 5: Understand your health care options

If you’re retiring before age 65, won't have retiree coverage from your employer, and aren’t yet eligible for Medicare, figuring out health care coverage can be a tall order. You’ll likely need to decide between numerous options, including, if available, your spouse’s employer-provided plan, COBRA, an Affordable Care Act marketplace plan, or a private insurance plan.

Learn more about health care choices with Viewpoints: Your bridge to Medicare.

If you retire early due to a medical disability

Should you have to end your career for medical reasons, you may be eligible to receive income from disability insurance from one or more of these 3 options:

  1. Employer-funded disability. Payouts from these policies generally replace about 60% of your income, which can leave a significant gap. Any income you receive from an employer-provided policy is taxable, and some disability insurance contracts provide funds only until you can train for work in a different career. You may be eligible for workers' compensation, but it typically lasts only until you are physically capable of returning to work.
  2. Privately funded disability. You may have signed up for a policy on your own if your employer didn't provide coverage, or if you wanted to supplement the coverage your company offered. Either way, payments from a self-funded disability policy are tax-free. If you have this type of plan, review your documents or consult your insurance agent for information about the duration and amount of your benefit.
  3. Social Security disability. Qualifying for Social Security disability benefits can be difficult and time-consuming. You may want to consult a financial advisor or attorney to help guide you through the process. If you are approved to receive these benefits, be aware that your disability payments automatically convert to retirement benefits when you reach Social Security's full retirement age (which is either 66 and 67, depending on your year of birth), and this benefit will remain the same.

Example: How the Bartons manage a medical disability

Let's look at a hypothetical couple, Jane and Michael Barton. Michael suffers from a significant medical condition at age 62, while Jane, age 60, continues working. They decide to try to wait until Michael turns 66 to take his Social Security retirement benefits, in order to receive the full monthly payment.

The Bartons had a total pretax household yearly income of $120,000 ($70,000 plus $50,000) before Michael left the workforce, meaning a $70,000 decrease in income. Yearly household expenses total $90,000 ($60,000 essential and $30,000 discretionary). In addition, the couple has $800,000 in retirement assets in a combination of taxable ($100,000), tax-deferred ($500,000), and tax-free ($200,000) accounts.

The couple cuts essential expenses by 10% ($6,000) and discretionary expenses by 30% ($9,000), bringing net household expenses to $75,000 for the upcoming year. On an after-tax basis, Jane makes $40,000, which leaves a gap of $35,000 in the first year. Michael receives short-term disability for 3 months, at the end of which long-term disability coverage kicks in. Altogether the insurance provides $30,000 after taxes for the year, so the couple needs to withdraw $5,000 per year for the next 4 years from their retirement assets (actual withdrawal will be higher as taxes are owed upon withdrawal).3

This withdrawal, combined with disability insurance and reductions in expenses, fills their income gap. People who face such a situation at a younger age may not be able to forego Social Security until age 66. In this case, they can build a bridge strategy that takes them to age 62, the earliest point at which they can receive Social Security benefits.

Tip: Health status, longevity, and retirement lifestyle are 3 key variables that can play a role in your decision on when to claim your Social Security benefits. If you claim early versus later, you will likely have lower benefits from Social Security to help fund your retirement.

In conclusion

If you've recently been laid off or have suffered a medical disability, the future may be challenging. But you do have options, even if you don't reenter the workforce full time. Working with an advisor, you can create a well-thought-out bridge strategy to help you transition between your career, retirement, and your Social Security benefits.

What could your Social Security benefit be?

See how claiming at different ages could affect your benefit.

More to explore


With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation.

2. A distribution from a Roth IRA is tax free and penalty free, provided that the 5-year aging requirement has been satisfied and at least one of the following conditions is met: You reach age 59½, suffer a disability, make a qualified first-time home purchase, or die. Each customer's situation, needs, priorities, and preferences are different. Financial decisions should always be made by the customer in full consultation with a tax professional. 3. This is a hypothetical example and is not intended to represent the performance of any security. For illustrative purposes only. Individual investor results will vary and may be more or less than those shown. The federal marginal bracket assumption utilized was 22% on the gross income. Example assumes no penalties apply at time of withdrawal. Roth IRA withdrawals are assumed to be qualified tax-free distributions.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

A bond ladder, depending on the types and amount of securities within it, may not ensure adequate diversification of your investment portfolio. While diversification does not ensure a profit or guarantee against loss, a lack of diversification may result in heightened volatility of your portfolio value. You must perform your own evaluation as to whether a bond ladder and the securities held within it are consistent with your investment objectives, risk tolerance, and financial circumstances. To learn more about diversification and its effects on your portfolio, contact a representative.

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