How to plan for an unplanned retirement

When it comes to retirement, most of us can agree that sooner is better. Very few people commit 40-plus hours per week with the intention of working forever, which is why the most popular question we get asked when building financial plans is "When can I retire?"

Most often, we approach retirement planning with the assumption that clients can work as long as they need or want to, but sometimes early retirement is thrust upon you. And that comes with real challenges.

Facing the harsh financial realities created by COVID-19, several large companies, including Delta and Wells Fargo, are implementing massive job cuts, some of which include voluntary separation and early-retirement packages. Employers understandably need to cut costs to survive tough times, but that leaves longtime employees asking themselves whether they can afford to retire sooner than they expected.

Early retirement means more years without employment income, replacing company-sponsored health insurance, and more reliance on your investment portfolio to cover living expenses. Making it work takes careful planning.

The first priority is to understand the options your company presents. In Delta's case, the offers include severance, continued health care and enhanced travel privileges. Often, there are choices (lump-sum payments vs. monthly income streams) and you would be surprised how frequently people elect the default benefit without considering the alternatives.

If your company is offering extended health insurance, is your share of the cost the same as during employment? It may not be. If you accept early retirement benefits at age 60 and get an additional two years of coverage, that still leaves three years (from age 62-65) before you qualify for Medicare. If both you and your spouse need to self-insure, that's more than $1,000 per month coming out of your bank account. And when you reach 65, most people are surprised to learn the cost of Medicare increases if your taxable income is higher. Figure out where you will land to avoid busting your budget.

Speaking of budgets, a lot of people think they know their family's annual spending. More often than not, they spend more than they realize. It's not too difficult to add up credit card statements, mortgage and car payments, etc., to give yourself a reasonably accurate estimate. Better to face a reality check now than run out of money later.

When to take Social Security is another important consideration and, frankly, one that too many people get wrong. The truth is most Americans take Social Security as soon as they retire because they are uncomfortable having zero income. In many cases, delaying Social Security and living off your investment portfolio in the meantime may be the more appropriate choice with greater long-term benefits. The amount you collect from Social Security increases 7 to 8% for every year you wait beyond age 62 (up to age 70). That guaranteed bump is even more attractive when interest rates are exceptionally low, as they are now.

The effects of inflation and potential inheritance are other items that tend to get overlooked. Both can have a significant effect on determining if early retirement is realistic.

Early retirement always sounds like an attractive choice, but making the right choice is what matters most.

Ben Marks is chief investment officer at Marks Group Wealth Management in Minnetonka. He can be reached at ben.marks@marksgroup.com. Brett Angel is a senior wealth adviser at the firm.