What to do if You’re Forced into Unexpected Early Retirement

You weren’t planning on retiring just yet.  Maybe your job is enjoyable enough and your co-workers are pleasant.  You figure a few more years at work will maximize your benefits, beef up your savings and get those last few mortgage payments over with.

Then BOOM! – out of the blue the unthinkable happens.  Your company eliminates your position, there are major changes to your health, or a loved one needs you to care for them.

It means you are suddenly retired, long before you’re ready.

It happens more often than you think.  In an Ontario Securities Commission survey, 26% of respondents said that their retirement was involuntary and that seriously impacted their finances.

An unexpected retirement derails your future savings and may force you to tap into your retirement funds sooner than you planned.  It can be traumatic, both emotionally and financially to have a sudden end to your career.

Assess your financial situation

To survive an early unexpected retirement, you need to face your financial situation right away so you can take action and make any changes as soon as possible.  List all your assets and debts to identify potential money making and money saving opportunities.

Get good advice and get it early. Find a competent and knowledgeable financial advisor who can help you with your retirement plan.  Be conservative with your assumptions for returns and inflation. 

Figure out your entitlements

If you lose your job due to downsizing you may be entitled to receive severance pay – or retiring allowance –  in compensation.  Negotiate the best possible package.

Severance pay is taxable.  You may be able to reduce the amount of tax payable by transferring it directly into your RRSP if you have available contribution room.

If you were with your employer for any years before 1996, that part of your severance pay can be transferred to your RRSP without affecting your deduction limit, even if you have no contribution room left.  This is called an “eligible transfer”.

Severance pay may be paid over one or more years so it could be beneficial tax wise if your employer agrees to spreading out the payments.

Here’s an example:  Bea was laid off from her long term job.  She received $100,000 in severance pay.  Of this, $37,600 was transferred to her RRSP directly as an eligible transfer and did not affect her contribution room.  She used $42,000 as an RRSP deduction using up her remaining contribution room.  The final sum of $20,400 she had to take as cash. 

If you had to leave work due a medical condition that prevents you from working you may qualify for disability CPP.  You may also have long-term disability as part of your employer benefits.  File for employment insurance as soon as you can.

This extra income can help pad your transition into early retirement.

Decide what to do with your pension

If you have a pension find out when you will be able to take payments.  You may have a choice of taking it as a lump sum and transferring it into a Locked-In Retirement Account.  You can usually start taking payments at age 55.  Or you may want to buy an annuity.  The decision depends entirely on your specific financial needs.

Identify new sources of income

A home equity line of credit is a good source of emergency funds, but you’ll need to apply for it while you’re still employed; otherwise, you probably won’t qualify. (Do this if you see a job loss on the horizon.) You may also be able to borrow from a whole life insurance policy, if you have one.

Avoid relying on credit cards for expenses; this is not the time to go into debt.

Look for ways you can earn income.  If you’ve been laid off, finding another full-time job can be tough. It might take awhile to land something and you’ll probably have to take a pay cut or accept part-time work – but it will be something.  Be realistic about your prospects.  Don’t underestimate the value of friends and family when you’re looking for a position.

If you want to try something new, investigate training programs.  Or try a home-based business venture if it won’t put your retirement savings at risk.

Use your home as a cash box

Consider taking in renters – students or short-term vacationers – if you have spare bedrooms.  You can also downsize to a smaller home or rental or move to an area where property prices are less expensive.  This can have a big impact on your budget,  but it’s a decision that must be carefully considered.

Related:  Consider These 3 Ways of Using Your Home to Fund Your Retirement Plans

Build a budget you can live with

Start with your cash flow, the money coming into and going out of your household.  If you have a spuse who’s employed it will help on the income side but you will still need to get a handle on your spending habits.  You’ll probably have to adjust your lifestyle and stretch your dollars. 

Related:  How to Transition From Being a Prudent Saver to a Prudent Spender

It’s a good idea to get rid of unnecessary expenses quickly so re-evaluate needs versus wants.  Create a values-based spending plan by identifying the things that really matter the most to you.

Put together a retirement income plan

A retirement income plan is a timeline that shows you how much income you will have, what sources it will come from, and when each source starts. It includes government and company pensions, and projected retirement and investment account withdrawals.

Once this plan is in place, you can decide if you must reduce expenses, find additional work, or if you’ll be just fine as things are.

You can also use your plan to compare alternatives. In many cases of sudden retirement, people think they must start their Canada Pension Plan benefits early, or instantly begin their pension, but that isn’t always the best option. Your plan allows you to layout various combinations of things and see which one gives you the best long-term outcome.

Avoid making decisions too quickly.  Too many people make a rash decision of selling their house or starting CPP early only to find work a few months later.  They would have been better off using their savings to tide them over.

List the benefits of your unplanned early retirement

You may find it easier to adjust to an unexpected early retirement if you think of it as a blessing in disguise, rather than a devastating setback. Now you’ll have the time and opportunity to do all sorts of things you didn’t have time for when you were working.

Some benefits of an unexpected early retirement may include:

  • No work-related stress
  • No work-related expenses
  • More time for family and friends, including aging relatives and fast-growing grandchildren
  • More time for favorite pastimes and/or hobbies
  • Opportunity to take better care of your health and fitness
  • Opportunity to complete unfinished household projects or take on new ones
  • Opportunity to volunteer your time and services to your favorite charity, service, or faith-based organization

The good news is that you can choose to fill your days with activities that make you happy – your days are your own.

The bottom line

At first, an unexpected early retirement may seem devastating. However, if you have a spouse who still works, your home is paid for, your debts are small (or you don’t have any), just a few adjustments to your monthly expenses could be all that’s needed for your household to survive without your work income.

One of the best things you can do when facing sudden retirement is to seek the assistance of a qualified financial planner, someone who is going to help you create a plan – not someone who is just going to try to sell you something.

When you change your mindset about becoming a surprise retiree, you may soon see that early retirement offers new opportunities as you pursue your money making dreams or favorite hobbies.

An early retirement doesn’t have to be the end of your retirement dreams if you know how to readjust.

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