There are so many Boomer retirement headlines, it’s difficult to keep up. “Nation’s First Boomer Turns 65 on New Year’s Day”; “What Happens when Baby Boomers Retire”; and the less optimistic “Boomers Report No Savings at All”. As advisors, most of us work with Boomers, most notably as they face retirement challenges that many aren’t adequately prepared for.
And we do see some headlines about early retirement – although not as many now as we did before the housing bubble burst. When I mention early retirement, the first thought is typically of those incredibly fortunate, well-prepared Boomers whose kids are out of college, who own their houses free and clear, and who will be able to afford pre-Medicare retirement plans. But we should be discussing another element of early retirement with all of our pre-retiree clients: an early retirement that may not be their choice.
In its 2012 Retirement Confidence Survey, the Employment Benefit Research Institute (“EBRI”) finds that nearly “half of current retirees surveyed say they left the work force unexpectedly”. The prospect of an unplanned early retirement is real, and is happening more frequently since the US economic downturn. (This is consistent with results from prior surveys, where the percentage ranged from a low of 37% in 2007 to a high of 52% in 1991.) Advisors need to discuss with their clients the risk of early retirement as much as the desire for early retirement.
The most frequent reasons for unplanned retirement mentioned in the study include health problems or disability (51%), employer-driven changes (21%), and the need to care for a family member or spouse (19%). In some cases, the retirees fortunately felt that they could afford early retirement along with the “negative” reasons cited. But only 8% of retirees mentioned only positive reasons, such as being able to afford retirement or wanting to do something else, as the drivers of early retirement.
“When Retirement Comes Too Soon” is the focus of a “Managing Retirement Decisions” brief offered by the Society of Actuaries for use by financial advisors and the public. The brief is a “how to” about being ready for and responding to the financial realities of an unplanned early retirement. The brief offers concise explanations of the resources available to the abruptly retired. Among them:
- Severance pay – the brief describes severance pay, and discusses some considerations for workers who have been terminated, including references to some of the legal aspects of severance and waivers.
- Health insurance – The transition to the full enforcement of the 2010 health reform act is discussed, as are COBRA benefits.
- IRA and 401(k) plans – Important considerations such as taxes and the tradeoff between income now vs. retirement income later are discussed.
- Social Security – the long-term financial consequences of taking Social Security benefits early are discussed.
- Unemployment insurance
- Replacement income
- Income annuities
- Defined benefit plans
- Disability income sources, if applicable
- Accommodations under the Americans with Disabilities Act (ADA)
The brief also emphasizes actions that pre-retirees can take now to prepare for possible unplanned early retirement. Establishing adequate emergency funds and eliminating debt are familiar to financial advisors as basic building blocks of solid financial planning for middle-income clients. Other recommendations focus on the individual’s personal balance sheet—keeping skills current, networking, and honing job-seeking skills.
The topic of unplanned early retirement gives advisors another way to encourage financial preparedness for all pre-retiree clients. Most of these clients know individuals who have left the job market unwillingly during the Great Recession, and can see that this reality may apply to them. Ensure that your clients know how much cash they should have in an emergency fund, and help them choose where to keep it so that it will be accessible if it’s needed. Verify that their disability income insurance is adequate, even if their employer provides some level of coverage. Help your clients understand the risk of a too-soon retirement, and encourage them to maintain their personal balance sheet (training and networking) as well as their financial one. Chances are, they’ll need your advice.
Cheryl Krueger is the founder of Growing Fortunes Financial Partners based in Schaumburg, Ill. Cheryl spent over 20 years working in the life insurance industry designing and pricing insurance and annuity products. She is a Fellow of the Society of Actuaries (FSA), trained in risk identification and management, with an emphasis on insurance industry risk.