by Joe Mont
Even those who have been diligently preparing for retirement can be in for a rude awakening if it arrives too soon.
Let's say you plan to retire at 70 and have based your saving and investing on that. Then an illness or layoff pushes you to leave the work force up to a decade sooner. Too old to easily get another job and too young to hit your desired numbers for a 20-to-30 year retirement, it can be a rough time indeed.
The first bit of advice from financial advisers is to keep your emotions in check. It is advice intended not just to keep you sane, but to prevent rash, counterproductive moves.
Fear can lead some to rashly react more to immediate obligations than with rationally with future needs. They may, for example, commit what many see as the one of the great sins of retirement planning — liquidating a 401(k) and just eating the added taxes, withdrawal penalty and lost funds from future compounding returns.
"It is the worst decision you can make, and you only make it if you are truly backed into a corner and there is nothing else you can do," says Ron Courser, president of Ron Courser & Associates in Grand Rapids, Mich.
"There are always options out there. At some point in time, you may find out you are going to live to be 90 and if you consume everything today it is going to be unpleasant. It's kind of like eating the seed corn. The more you consume today the less you are going to have tomorrow," Courser says.
It is even more troubling when grabbing at that money comes as market returns ebb.
"You have chopped it off at its legs when it was low because you needed the money," says Tony Zabiegala, vice president of Strategic Wealth Partners in Seven Hills, Ohio.
Assess your employer's benefits
Take stock of whatever severance package an employer may put on the table. If you have leverage to negotiate better terms, use it. In particular, push for the best health insurance compromise you can.
"How long will your old employer give you on their health care plan?" Courser asks. "That's probably the biggest single expense they will face. If someone wants to work, they can always find something to do, even if it's going down to the temporary employment guy for $9.97 an hour. But the health care issue is really important. When you are laid off at 57, even if you do COBRA for a couple of years, eventually you have to find health insurance. And you may already have a few things going on in your life that would make it a little more difficult to get health care coverage."
Courser advises seeking out an adviser who specializes in health insurance to help find a plan that finds your needed sweet spot between coverage and cost.
Draw from your IRA
The IRS allows what is called a 72(t) exception for IRAs. While the government typically requires that funds pulled out before age 59.5 are subject to regular income tax on the withdrawal and a 10% penalty tax, under 72(t) guidelines the penalty can be avoided at any age.
"In essence, it says you can avoid the penalty by taking equal payments over a minimum of five years or until you become 59.5, whichever is longer," Courser says. "You get a 56-year-old guy who gets deep-sixed and that's an approach you have to take a look at. He may not do it, because it depends on his other assets, but if the biggest asset is his IRA it may be necessary to look at that and see if we can draw some income off it. It will still be taxable at normal rates, but at least you won't be penalized."
While draining your 401(k) plan is ill-advised, tapping into your IRA may be a solid strategy.
Revise your allocations
"They have to put together an allocation plan that is going to give them some kind of income," Courser says of forced retirees. "They have nontax-deferred assets they can use, but you need to generate some income. It really becomes critical to develop a plan that will give them the income they need until they can tap into the Social Security system and take some of the pressure off their retirement assets."
Don't wait to be pushed into an early retirement before starting to plan for that scenario.
Zabiegala works with his clients to create various "buckets" of assets to ensure they have a dynamic retirement plan that can handle whatever curve balls are thrown their way.
"Don't just put all of your money into a long-term bucket," he says. Short-term, medium-term and emergency savings and investments can help weather for any storm.
Emergency savings of three to six months are important so that "you are not sweating when the crunch time comes," he says.
For each portfolio, risk levels should be appropriate, with emergency funds safely in cash and longer-term needs relying more on equities for growth until retirement approaches.
Investors need to be realistic about their savings needs, Zabiegala says. When a client says their family history means they will likely die at a younger age, he will persuade them to add a few extra years to their projection to be safe. Don't think you'll live to see 85? Well, assume 90 years just in case.
He also urges caution for those who "dip into their savings like a piggy bank" under the assumption that they can always just go back to work as the well runs dry.
It may sound good on paper, he says, but it assumes that those jobs are out there. You may say you can be happy as a Wal-Mart greeter, but very few can adapt to going from "six figures to $6 an hour." A little bit of frugality now can pay off greatly in the future.