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Forced Into Retirement Early? Here's What to Consider

Retirement Planning
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Whether it's because of a layoff or a health or disability problem, being forced into retirement early can throw a wrench into a carefully laid out retirement plan. But it's not the end of the world. Here's what you may want to know about ending your career sooner than you anticipated and what you can do to help prepare for an unexpected retirement.

Examining Your Finances

Regardless of why you're forced into early retirement, you might want to start by assessing your current financial situation. Determine how much you have saved for retirement and review your budget so you can calculate how long your savings will last at your current level of spending.

If you haven't saved much, you may want to start drafting your "Plan B" retirement budget. In other words, consider calculating the bare minimum you will need to feel happy, healthy and satisfied in your retirement. Once you've identified the most important aspects of your life that you need to maintain, it may become easier to cut the less critical items that you might have looked forward to but can live without. If you budget effectively, you may be able to readjust your spending when you reach your full retirement age, which will depend on the year you were born.

Tapping Into Your Savings Early

Depending on when you're forced to retire, you may not be able to access your retirement accounts or Social Security right away. Either way, you'll want to understand the costs and implications of tapping into a 401(k) or individual retirement account (IRA) early, or taking Social Security before you have reached your full retirement age.

You may be required to pay a 10 percent penalty on any early distributions you take from a retirement account, according to the IRS. A distribution is considered early if it occurs before you have reached age 59 1/2. In the case of a Roth IRA, a distribution is also early if you have held the account for fewer than five years, even if you're older than 59 1/2. And don't forget that the 10 percent penalty is in addition to the ordinary income tax you will owe on your distribution.

However, there are a couple of options available to access your money early if you really need it.

Rule of 55

If you leave your employer during or after the calendar year that you reach age 55, then you may be able to access the money in the 401(k) you hold with that employer without facing a penalty. This is one reason why you may want to consider rolling over 401(k) plans from previous employers into your current employer's 401(k).

72(t) Early Distribution

The IRS may allow a retirement plan account holder under the age of 59 1/2 to access their funds without penalty under the tax code 72(t). This code allows you to take substantially equal periodic payments (SEPP) from your IRA or 401(k), as long as you no longer work for the employer sponsoring the latter.

To do this, you take fixed SEPP distributions monthly or annually for at least five years or until you reach age 59 1/2 — whichever is longer. For instance, a 53-year-old early retiree would have to take SEPP distributions until at least age 59 1/2, while a 57-year-old would have to take them until at least age 62 before changing distribution amounts.

There are three different methods to distribute your SEPP: required minimum distribution, fixed amortization and fixed annuitization. They can get quite complex, since they are determined by your life expectancy and other calculations. Your figures must be correct to decide which SEPP method could help support your financial goals if you've been forced into retirement early. Consider consulting with a financial professional.

Taking Social Security Early

You may access your Social Security retirement benefits as early as age 62, but it's important to remember that you permanently reduce your monthly benefit by doing so. The closer you are to your full retirement age — between ages 65 and 67, depending on your birth year — the lower your benefit reduction will be, according to the Social Security Administration (SSA).

In addition, if you find yourself involuntarily retired because of a disability, you may be able to apply for Social Security Disability Insurance (SSDI), according to the SSA.

Replacing Your Employer Benefits

Since you will generally not be able to keep your health or life insurance with your former employer, you may want to explore what options you have to replace these benefits in retirement. You can access Medicare for your health insurance needs once you reach age 65, but until then, you may need to find an insurance plan on the Health Insurance Marketplace, or you may qualify to keep your insurance under the Consolidated Omnibus Budget Reconciliation Act (COBRA).

Bowing out of your career before you are ready isn't the most ideal way to retire. But even in a situation you didn't plan, you can still try to make the most of your forced retirement and help keep your finances on course.

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