60% say they retired too earlier and regret it. New survey by Transamerica offers suprising insights into early retirement.
More than half of America’s retirees have not fully recovered from the Great Recession, according to a new survey from Transamerica, and one key factor is that nearly two-thirds (61%) have been unable to keep working as long as they’d planned.
Transamerica’s Current State of Retirement surveyed more than 2000 retirees in July of 2015. The retirees were all age 50 or older, at least semi-retired and they had all worked for a company with at least 10 employees for the majority of their career. It found that, although retirees were, in general, upbeat and feeling good about their lives, only 45 percent had either fully financially recovered or were not impacted by the Great Recession. Thirty-five percent said they had somewhat recovered, eight percent have not yet begun to recover, and 12 percent feel they may never recover from it.
Yet the most striking finding was that, since the Great Recession, so many older people had been forced to retire early. Seventy-nine percent of those in their 50s; 67% of those in their 60s, and 39% of those in their 70s or older retired sooner than planned.
That’s not news to Frank Remund, CFP, a registered independent advisor and enrolled IRS agent in Beaverton, Oregon. In April, Intel announced a plan to cut its workforce by 11% through a combination of involuntary separations, plant closings and early retirement. Remund has been fielding calls ever since from Intel employees trying to decide whether to take the buyouts Intel has been offering, and if they do, how to plan for a retirement that’s significantly earlier than they had expected.
About 18,000 Intel employees work in Oregon, mostly in the Portland metro area. The company is not closing any facilities in Oregon, so much of the impact of downsizing will fall on mid- and late-career employees. These employees have been offered separation packages ranging from 12 weeks pay plus six months of medical coverage (or $9,000 in cash) for those with less than two years tenure, all the way up to an Enhanced Retirement package for very senior employees with a year of base pay and one year's performance bonus, plus two years of medical coverage.
Remund says that his clients have a lot of questions. “They want to understand how many net dollars they will get through the buyout, but they are also interested in what they can do right now to help their tax situation and long-term financial security,” he explains.
Events like the downsizing at Intel have been major factors in early retirement since the recession, according to the survey, among retirees who retired sooner than planned, two-thirds (66 percent) cite employment-related reasons for having done so. That was especially true of the oldest retirees, 70 percent of whom retired due to employment-related reasons. Retirees in their 50s were most likely to stop working because of poor health. Very few older Americans – just 12% -- stop working because they have saved enough money and can afford it.
Strategies for coping with unexpected job loss
“Job losscan happen at any age – very few people work in one career or for one company any more. And, it’s really a matter of continually updating ones knowledge and skills over a life time so that the individual can remain as flexible as possible and as open as possible to opportunities in the workforce,” says Louise Schroeder, a Certified Financial Planner™ who founded Personal Financial Solutions, Inc. in 2001.
As with many challenging life situations, good financial planning can help. Here are some of the issues that Schroeder and Remund suggest discussing with your clients facing early retirement.
Analyze severance package (if any)
Even the most generous severance packages are designed to save the company money. Your clients who take them are probably going to end up with less in income and retirement savings than they would have, if they had retired. You can help them figure out exactly how much the package is worth, and how much they will have to make up with personal savings or lifestyle changes to ensure security. Pay attention to tax implications. A one-time lump sum payment may create a large tax liability and cut into the package’s real value to your client.
Make retirement plan decisions
This is a good time to assess how well your client has saved for retirement so far, and whether that savings will be adequate for income needs after life. In some cases, there’s a lag between when the early retirement package is announced and when it takes effect. Remund is urging his client to use the three-month window to max out their 401(k) contributions for this year, because they will not be able to contribute later after they’ve separated from Intel.
Think about health care
Before the implementation of the Affordable Care Act, continuing health care coverage was a major issue for early retirees. Now, however, Remund says that some of his clients are looking for ways to qualify for subsidized coverage from the ACA exchanges. “If they can keep their income to a certain level, they can have pretty affordable health insurance,” he says.
Decide when to take social security benefits
“[You have to] evaluate the individual’s sources of income under several scenarios – where Social Security is taken as soon as possible (age 62), at the normal retirement age (66), or postponed to age 70. The earlier it is taken, the smaller the benefit will be; the longer before it is taken, the larger the benefit will be,” says Schroeder. But that’s just the beginning of the analysis, Schroeder explains. Clients also need to look at how their Social Security strategy affects their spouses’ benefits, whether waiting will force them to withdraw money from retirement accounts early, and what the tax implications of each scenario will be.
“It’s all about what tax bracket you’re in, what marginal tax bracket you’re going to be in and how tax-efficiently you can take the withdrawals,” says Remund. Withdrawing 401K assets increases taxable income – even if the investor is older than 59 ½ and can skip the penalty – and can push people into higher tax brackets (and out of subsidized health insurance policies). Cashing out taxable accounts can trigger capital gains taxes. Every situation is different, says Remund, and requires careful analysis.
Explore part-time or entrepreneurial opportunities
“Most people can’t afford to sit on the couch for the rest of their lives – and most don’t want to do that either,” says Remund. Early retirement gives people a chance to try something different – whether part-time work, or starting a new business or even, like Schroeder, becoming a financial planner; she was a university teacher, then a university foundation executive before getting her Certified Financial Planner designation in her 50s.
One big mistake, Remund says, is staying in a house that is too big or too expensive after early retirement. A house that makes perfect sense for an executive earning $150,000 a year may be an undue burden on someone who is retired.
Early retirement is one of several topics that that financial advisors should be discussing with their older clients, as they work to develop a comprehensive financial plan. According to the Transamerica survey, only 7% percent have contingency plans for retiring sooner than expected and/or savings shortfalls. “If you have clients in their late 40s and early 50s, that would definitely be a conversation to have with them,” Remund adds. “Especially in bigger corporations, if there’s a shift in that corporation, they’re going to let go of that demographic because it’s an expensive demographic. You want to make sure you’re putting away money for the unexpected.”