Blog content updated: March 24, 2022
The COVID-19 pandemic has changed life as we know it, beyond the threat the virus poses to our health. It also unleashed a storm of unforeseen circumstances: a volatile stock market, record job losses and unemployment rates, and isolation from loved ones. These factors caused many to leave the workforce prematurely and retire earlier than expected.
Research shows more than 3 million Americans retired early due to the pandemic.1 In fact, the number of early retirees alone would have accounted for predicted total retirement numbers, had retirement kept pace with the previous decade’s trend.2
Whether voluntary or forced, early retirement is trending upward and catching many off-guard. If you find yourself entering retirement earlier than anticipated, you’re in good company. But what happens next?
While unexpected retirement presents financial challenges, there are steps you can take to help maximize your money as you settle into your post-workforce lifestyle. Consider the following measures to help you understand and weigh your options.
Take Inventory of Your Expenses
While spending used to decrease in retirement years, this simply isn’t the case anymore—especially when you factor in today’s inflation. And the best way to manage spending in retirement is to take an expense inventory. Start with essentials that need to be factored into the top of your budget: shelter, food, transportation, and utilities. Then, try to set aside some money each month for a “rainy day” or emergency fund to prepare for the inevitable home repair, car replacement, or large, unexpected expense down the road. While early retirement can deplete your savings, you can still find unique and creative ways to save and make your money go further. Longbridge Financial recently shared these money-saving tips you can easily implement in your retirement lifestyle.
Strategize Social Security Claims
When it comes to Social Security benefits, there are two schools of thought. The first is to defer collecting benefits for as long as possible—ideally, until you reach the full retirement age of 66 or 67, or even maximize your benefit at age 70. The longer you wait, the bigger the monthly amount you’ll receive. The other school of thought is to claim Social Security benefits as early as possible, often around age 62, stemming from fear that the Social Security trust fund will run out of money.
Whichever theory you subscribe to, it’s important to consider your age. While the average person opting to receive benefits at the minimum age of 62 could expect to receive about $1,350 per month, waiting until the maximum age of 70 could allow them to receive monthly benefits of around $2,376—a significant difference.3 If you want to defer benefits until your full retirement age—but need cash flow now—consider bridging the gap with some of the following resources.
Collect Your Pension
If you have an employer-provided pension, now is the time to start collecting. However, pension payouts come with a choice of monthly or lump-sum distribution methods. While traditionally paid out monthly, more employers are offering one-time lump sum payouts. Before selecting your preferred method, consider the tradeoffs, pros, and cons of each. While a lump sum may provide more flexibility, you’ll assume total responsibility of managing and protecting the entirety of your funds. Make sure to consider the risk of potentially outliving your money, or reducing your benefit due to risky investments.
Make Withdrawals From Your 401(k)s and IRAs
If your employer-sponsored plan was a tax-deferred retirement plan, such as a 401(k) or traditional Individual Retirement Account (IRA), you may consider withdrawing from these accounts to supplement your income. Funds can be withdrawn without penalty after age 59½. If you withdraw before this age, you’ll need to pay taxes on the money, as it’s considered income. Also, note that these withdrawals could put you in a higher income tax bracket, and potentially affect eligibility for tax credits and other benefits.
Tap Into Your Home Equity
Another source of cash to help you navigate early retirement might be right in your home. While people traditionally think of personal net-worth as mainly savings, stocks, and bonds, the reality is actually quite different. Research shows that home equity now represents more than two-thirds of total wealth for the average 65-year-old American couple.4 And with home values skyrocketing, you may be surprised to learn just how much equity is in your home.
Tapping into it with a Home Equity Conversion Mortgage (HECM)—also known as a reverse mortgage—could be a viable option for early retirees. A reverse mortgage allows homeowners age 62 and older to convert a portion of their home equity into cash to use as they wish. If there’s an existing mortgage on your home, the reverse mortgage is first used to pay off the loan—and since no monthly mortgage payments are required5, you can eliminate that monthly expense and keep more cash to use as you see fit.
Best of all, the Federal Housing Administration (FHA) increased the HECM national lending limit for 2022—meaning that you may be able to access more cash than previously available.
Advantages of Early Retirement
While presenting its share of challenges, early retirement can also be a catalyst to make positive life changes. You can spend more time doing things you love, discover new hobbies, and create memories with friends and family. If you could use an additional source of funds to help you settle into this new retirement lifestyle, consider tapping into your home equity.
Longbridge Financial is a leading reverse mortgage lender committed to providing options to help meet the needs of older adults. They take the time to get to know you, your goals, your home, and your finances—and if a reverse mortgage is not the best option for you, they will tell you so.