Making the Best of a Forced Retirement

For many of us, the hope is to glide into retirement sometime in our early to mid-60s. After 40-plus years of hard work, it’s time to enjoy the fruits of our labor – on our own terms. Except when things outside of our control derail those well-laid plans. Instead of a gradual transition, we get a forced retirement.

Half of retirees say they retired earlier than expected, according to EBRI's 2024 Retirement Confidence Survey. While two in five retirees who retired early say they did so because they could afford to, nearly seven in 10 retirees indicate the reason was out of their control. 

An unexpected exit from the workplace can mean missing out on additional years of peak earnings, potentially lower retirement benefits and the need to start drawing down assets early.

Without a financial plan, you could find yourself struggling to cope. The same goes for those who have a plan but left little room for contingencies. A financial plan shouldn’t work like a rock foundation, but rather a suspension bridge – flexible and capable of handling a wide variety of shifting conditions.

A forced retirement doesn’t have to mean an unenjoyable retirement. There are some steps you can take to help keep your retirement dreams alive as best as possible.

Find healthcare coverage

First and foremost is your health.

If you are younger than age 65, maintaining health insurance coverage before Medicare kicks in is critical. Medical bills are the biggest cause of bankruptcy in the United States. Even without coverage from an employer, you may still have options available to you for health insurance. If you are married, you could join your spouse’s plan. Or find coverage through COBRA or a healthcare exchange.

When shopping around for health insurance, be sure to look at more than just the premium. Examine the quality of coverage, deductibles, co-pays and out-of-pocket expenses.

Review your financial plan and adjust, if necessary

Having to leave the workforce earlier than planned isn’t ideal, but you may be in the fortunate position to retire comfortably with few adjustments to your long-term financial goals. The only way to know is to get a review of your finances and then putting together a decumulation strategy. Essentially, you take stock of all your assets (with your spouse’s) and potential income sources, from your 401(k) to Social Security, and then create a sustainable income stream to last throughout retirement.

If that provides the means to live the retirement you want, then there’s no sense in waiting. If not, you may need to adjust some proverbial retirement levers. Can you make changes to your desired retirement lifestyle? Is there room to lower your expenses? Does downsizing your home for additional income make sense? Should you file for Social Security early? And do you need or want to continue working?

Decide if you want or need to work, if you can

Contrary to popular belief, many people plan to work later in life. Of course, some people can’t afford not to keep working.

Regardless, continuing to work, if you’re able to, needs its own type of financial planning. That’s because earning income in retirement can impact you in a variety of ways. You may find yourself in a higher tax bracket if you simultaneously withdraw money from your retirement accounts. If you file for Social Security, earning over certain income thresholds can mean having some of your benefit withheld. Not to mention, up to 85% of your benefit may be taxed based on your combined income.

Then there are job-related considerations. Do you need training to advance your skills? Can you transition your most recent job into a consulting role? Or would you like to try working in a brand-new industry?

Carefully evaluate your severance, SIPP and surplus payment options

If you are receiving a severance, SIPP or surplus payment, these often have several different payout options. You should carefully consider the tax and cash flow implications of each one. Are medical benefits provided? Are you barred from seeking employment in the same field with a competitor? How does your pension change if you accept the package?

Sometimes severance packages come with outplacement assistance services. Take full advantage of them. Also, with the various financial implications and usually limited time you have to decide, talk with a financial adviser who understands your benefits and can evaluate your situation to make sure you select the right option.

Make sure you understand the risks of financial products

An early or unexpected retirement may have some considering a guaranteed income product as a source of financial reassurance. But guaranteed income products, namely annuities, come with many strings attached. They are often complex and don’t always work the way you expect. You may have to pay high fees to access your money when you need it and you may have to sacrifice valuable investment growth that you would otherwise receive from a traditional investment account. If you’re thinking about buying an annuity or other financial product, read the fine print and get an objective opinion.

Determine what you want to do in retirement

There’s more than just navigating the financial challenges of a forced retirement. There are a variety of mental and lifestyle challenges, too. For one, you must get comfortable with all the newfound free time, as well as the idea of spending rather than saving money. Not spending enough to live a fulfilling retirement can be just as much of a problem as spending too much. Knowing how you want to fill your days during your retirement years can make the transition less stressful and more rewarding.

After decades of working, the transition to the retirement you’ve earned may not go as planned. But if you can adapt accordingly, it doesn’t have to make your retirement any less satisfying.