By Kerry Hannon
This article is reprinted by permission from NextAvenue.org .
The coronavirus pandemic is causing many older workers who’ve lost jobs or been offered early retirement severance packages to decide to pack it in.
But taking early retirement can throw a monkey wrench into your future financial security. That’s why it’s vital to be cautious before doing it. I’ve talked to several sharp financial advisers for their tips on how best to prepare to retire earlier than you planned; you’ll see their suggestions below.
80% of older Americans can't afford to retire - COVID-19 isn't helping
More than 25 million older Americans are financially insecure - living at or below the federal poverty level. We spoke with a few senior citizens who shared about their economic challenges.
“The numbers suggest that while many older workers displaced by COVID-19 job loss are still seeking work, a large number have dropped out of the labor market entirely,” Jennifer Schramm, a senior strategic policy adviser at the AARP Public Policy Institute wrote in her blog: “ Devastating Job Losses May Be Pushing Older Workers Into Retirement. ” As a result, Schramm said, “job losses associated with the pandemic may be leading to a substantial rise in earlier-than-planned retirement.”
Frankly, as someone who writes about work and money for people over 50, I’m worried that frustration with the job search or eagerness to grab early-out offers are triggering people to retire early, with potential financial reverberations for the rest of their lives.
The risk of claiming Social Security early
Take Social Security — or rather, maybe don’t.
Due to the heightened unemployment of the 2007-09 recession, “the take-up of Social Security at age 62 jumped from 42.2% in 2007 to 46.9% in 2009,” Alicia H. Munnell, director of the Center for Retirement Research at Boston College, wrote on MarketWatch. And, she added, “I would expect this pattern to repeat itself in the wake of COVID-19.”
Here’s why that’s a concern: Starting to claim Social Security at 62 because you aren’t working will then lock you into a level of much smaller benefits than if you’d waited until later. “Benefits claimed at 70 are 77% higher than those claimed at 62,” Munnell wrote.
“If you qualify for the maximum amount of Social Security and take your benefits at the youngest allowed age, you will receive $2,252 each month,” says Michelle Connell, a Chartered Financial Analyst and owner of Portia Capital Management in Dallas. “If you wait until you are 70, you will receive $3,980 a month.”
Those enticing early retirement offers
Undoubtedly, it can be enticing when your employer dangles an early-retirement package compelling enough to grab it and not look back.
A growing number of companies from airlines to media firms have been making these offers due to the pandemic. According to CNBC, nearly 4,000 Southwest Airlines /zigman2/quotes/201071949/composite LUV -1.94% workers and 2,235 Delta /zigman2/quotes/200327741/composite DAL -2.09% pilots signed up for buyouts. Delta offered partial pay for up to three years plus extended health insurance coverage.
A spokesman for the Air Line Pilots Association told CNBC: “The voluntary early-out program participation exceeded our expectations.”
Such offers might not come around again anytime soon and there is no guarantee your job will be safe.
Don’t expect your company to follow it with another severance package for future rounds of layoffs, notes Connell.
It’s logical to me that older workers, especially those in spitting distance of age 65, would decide to bid employment adieu. Medicare kicks in at 65 and full Social Security benefit eligibility starts at 66 or 67.
Whatever the impetus, the decision to retire is often emotional and fraught with myriad calculations. It’s generally not a solo decision if you have a spouse or partner or minor children.
Money advice for the early retirement decision
Here’s how to help shape a financial framework if you’re contemplating early retirement:
Prepare a budget. Retiring early “can be a difficult decision, since there are so many unknowns to consider,” says Charles Adi, a Certified Financial Planner at the advisory firm Blueprint 360 in Houston. “I encourage my clients to take some time and evaluate the three critical retirement planning areas: income, expenses and insurance.”
First, determine your monthly income and spending needs in retirement.
“Be careful not to underestimate your discretionary budget for travel, shopping, eating out and spoiling the grandkids,” Adi says. “You will be surprised how quickly small purchases add up.”
Ask yourself this key question: Will there be areas you can cut back expenditures, say, by moving to a smaller home or town where the cost of living is cheaper?
Websites like Mint.com and YouNeedABudget.com offer free software to track spending and set up budgets.