As a result of the COVID-19 pandemic, working from home for the first time has been an eye opening and life changing experience. Some people, who have gotten a taste of a different lifestyle, may have liked it too much: they don’t want to work anymore and are tempted to retire early. Others look to lesser jobs with lower pay to enjoy more free time.
Those who are fortunate to still have a job at 62 will likely ride it out.
At the other end of the spectrum are many involuntarily furloughed workers who are still unemployed. Sadly, each group faces potential pitfalls when tempted to make a hasty decision without having a plan in place. So, here is my professional advice to everyone: “Look before you leap!”
For me, the most troubling part is short-termism because it is usually at the expense of long-term planning and security. My job is to protect and help you month-to-month and year-to-year. I don’t want you or anyone else to run out of money or face major financial difficulties due to hasty decisions made while under duress in prior years. Life in the present without income, health and other insurance and benefits covered through work prior to or nearing retirement age is truly frightening.
The number one cause of bankruptcy in America is medical costs. “How will I replace my medical insurance if I retire early?” is a critical concern. Normally, employers are required to offer COBRA insurance under the Group plan for up to eighteen months. You pay the full cost, which includes the employ-EE share, employ-ER share, plus two percent. You could be paying $1,000 or $1,500 a month. The other alternative is finding private insurance. And this is where the devil is in the details.
A high deductible co-insurance plan, where you think you have good coverage and you then you file a claim, could give you a big surprise: a bill for thousands of dollars. Without having an emergency fund to help, you could run into real financial trouble, which raises the question: How will you bridge that financial gap from now until you reach Medicare age?
Not Having A Plan
Most workers have gotten used to a certain income stream over the years. But now, furloughed or unemployed, where is that future income coming from? What will that income look like? Unfortunately, many individuals have never had a financial advisor work up a financial plan for them so they really don’t know what the alternatives are.
Having a plan means finding someone you can trust to do the plan. This is a big step for most people because it means sharing detailed information they have never shared with anyone before. Once they take the leap in finding an advisor, usually through a referral, the advisor must look at all the assets first. The entire process entails a lot of listening to learn what that person is thinking and feeling – not only to the financial facts but also to what their long-term goals are and what they want to achieve in short-and-intermediate-terms. If a person is willing to work part time, we can put together a doable plan.
If the plan leans toward going back to work, (even though they don’t want to) this will be our recommendation. It might only be for the next five years. We avoid irreparable harm by not cutting off your paychecks and benefits early, and you know the facts, figures and realities for the future. Can you see how much greater the ramifications would be by not meeting with an advisor? You could miss out on a wealth of valuable information as a result. When an advisor listens well, and does his or her job well, they can walk you through any life-changing event.
Starting Social Security Benefits Too Early
Sure, people know Social Security is the background, and that some amount will be there for them, thanks to estimates sent to them over the years. Even then, if you retire at 62 instead of at full retirement age, you miss out on several years to contribute to it, and you’d permanently reduce your monthly benefit by 30 percent by taking it early.
If you are in a two-income family and you start taking Social Security benefits early, your spouse can collect benefits from your wages if the amount is higher than what he or she earns in their lifetime. But there is a financial impact on a lower wage earning partner or spouse. By your taking a permanent financial haircut, if you will, one potential pitfall of retiring early is your surviving spouse receives lower benefits until their time of death.
The Numbers Tell the Story
Dennis, 58, was offered an early retirement package consisting of six months’ severance and a continuation of health insurance benefits. He could make nearly the same amount of money until he is 65, so he was having trouble deciding. Could he find work later on? Could his salary bridge the gap to retirement? Seven years is a long time. He is also concerned about what it might do to their long-term financial plan. After I ran the numbers, it was clear to us there was too much risk to taking the package and stopping the paychecks.
Even prior to the offer, we had Dennis and Mary retiring and 65. They would be just making it financially with enough resources to last them their lifetimes. If comparable work or a better paying job could not be gotten outside of his work for the next seven years, the couple would have to tap into their nest egg, impacting them down the road. They were fine with the decision, and Dennis will continue working. By not taking the package, however, he runs the risk of being laid off. But we will handle that if and when it happens.
That’s why a personalized financial plan matters. At Hefren-Tillotson, we know that decisions made within the next 18 months are going to impact lives for years to come. So, know that we are here to help you look before you leap. Contact me at 412-633-1696 today.