Forced into Retirement? Consider These 7 Strategies
Key Points – Forced into Retirement? Consider These 7 Strategies
- Avoid Making Emotional Decisions
- Work with a Team of Professionals
- Figuring Out Where to Spend from
- 8-Minute Read | 23 Minute Watch
Strategies to Consider If You’ve Been Forced into Retirement
Have you put forth a lot of effort into planning for retirement only to be laid off prior to your anticipated retirement date? According to the Age Discrimination in Employment Act of 1967 (ADEA),1 it’s illegal for employers to implement a mandatory retirement age in many industries.
However, that still hasn’t stopped some employers from forcing workers into retirement. Forced retirement can come in a few different forms. Some companies terminate some of their higher-earning employees to cut costs. Other companies may force employers who have health issues into retirement if they can no longer fulfill their job duties.
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The COVID-19 pandemic resulted in millions of people leaving the workforce, whether they did so involuntarily or voluntarily. A significant portion of those people who are 55 and older have not returned to work.2
No matter what forced retirement looks like, it can be a very difficult situation to navigate. Here are seven strategies to consider.
1. Take Some Time to Reassess Your Financial Life
From anger and disappointment to confusion and financial worry, there are so many emotions associated with a forced retirement. We talk a lot about why it’s important not to act upon fear and greed when investment. The same principle applies to not making knee-jerk reactions that are fueled by your emotions following a forced retirement.
Instead, take some time to decompress and reassess your financial life. If you have what could be considered as a “financial junk drawer of financial planning” and are unsure about how certain accounts are performing or what some of your insurance policies cover, use this time to get organized. Hopefully, you got some sort of severance package that can temporarily ease the sting of being forced into retirement. If so, make sure you have a good understanding of what your severance package entails.
2. Work with a Team of Professionals
Our team firmly believes that retiring on your own terms requires a lot of planning. The same goes for figuring out how to proceed if you’ve been forced into retirement. Rather than potentially being consumed by financial stress, let a team of professionals help you.
It’s understandable to be upset with your former employer that has forced you into retirement, but let’s think about retirement from a different perspective. Instead of thinking about what you were forced to retire from, what are you retiring to? What do you want to do for the rest of your life?
At Modern Wealth, our CFP® Professionals create personalized financial plans that are designed around an individual’s needs, wants, and wishes. Our CFP® Professionals will be quick to tell you that they need the assistance of our other team members to build each plan. They work alongside our CPAs, CFAs, estate planning specialists, insurance specialists, and company retirement plan team. Our team of professionals collaborates on behalf of our clients with the goal of giving them more confidence that they’re making informed decisions with their money, freedom from financial stress, and time to spend doing the things they love.
Do You Take the DIY Approach to Retirement Planning?
Whether they’re forced into retirement or retiring on their own terms, there are many people who take the do-it-yourself approach to retirement planning. But ask yourself these questions. If you need medical attention, are you going to try to attend to it yourself? If you’re having car problems, are you going to try to fix them yourself? The answer to those questions is likely no. Hopefully, you’ll at least consider going to visit a doctor for medical issues and a mechanic for car issues.
Even if you think you can handle your finances on your own following a forced retirement, consider visiting a wealth management services firm for a financial checkup. Remember that you don’t know what you don’t know. We want to make sure that you don’t miss any potential opportunities that can be overlooked while DIY financial planning.
3. Making Sure You Have a Goals-Based Financial Plan
We touched on this a little bit while discussing the importance of working with a team of professionals, but this strategy bears repeating. How effective can a financial plan be if it doesn’t incorporate your goals?
Even if you do find another job with similar compensation shortly after being laid off, take this time to think about your life goals along with your financial goals. What are you going to do in retirement, and how are you going to fund that lifestyle? If you didn’t already have a goals-based financial plan, that could significantly alter your future plans.
Stress Testing Your Financial Plan
When our team builds financial plans, we stress test them against many different forms of risk. Could your plan survive a market downturn like the Great Recession or Dot-Com Bubble while you’re in retirement or would you need to go back to work? What if you or your significant other required a long-term care stay? Or what if you lost just about everything in a natural disaster?
Well, the risk of unexpectedly losing your job and being forced into retirement is something that needs to be planned for as well. Planning for the unexpected is a critical component of the retirement planning process. It’s important to stress test your plan through various economic conditions and situations.
What’s Your Plan’s Probability of Success?
Stress testing is an essential part of the Monte Carlo simulation that our team uses when building financial plans. We want to determine your probability of success of getting to and through retirement without ever having to adjust your spending.
For example, let’s say that we run your plan through a Monte Carlo simulation and it shows that you have a 75% percent probability of success. That doesn’t mean that there’s a 25% chance that you would run out of money in retirement. It means there’s a 25% chance you might need to temporarily adjust your spending. Seventy-five percent is at the low end of our ideal range of probability of success. We typically like clients to be in the 75-90% range, but it obviously depends on your risk tolerance.
Being forced into retirement obviously wouldn’t likely improve your plan’s probability of success, but if you have planned for that possibility, it hopefully won’t alter it much (if at all). That’s why it’s so important to have a financial plan in place and work with a team of professionals well before you intend to retire.
Even if you’re unsure about working with a team of professionals after being forced into retirement, download a copy of our Retirement Plan Checklist to gauge your retirement readiness. Whether you plan to go back to work or start retirement early, go through our 30 checklist items and age-and date-based retirement timelines.
4. Spend from Your Traditional 401(k) or IRAs If You’re 59½ or Older
Even for people who are close to voluntarily retiring, there can still be a sense of panic when determining how they can move forward without a paycheck. Where will you spend from and when throughout retirement?
When people need instant income, savings accounts are typically one of the places they’ll likely dip into. However, there are other options to consider if you’re 59½ or older—your old 401(k) or IRAs. IRA withdrawals are typically penalty-free if you’re 59½ or older. There’s a 10% penalty for pre-59½ withdrawals. If you’re 55 or older, you may be eligible to take penalty-free withdrawals from your employer-sponsored retirement plan if you’ve been forced into retirement.
As always, make sure to consider your current and future tax bracket before deciding where to spend from. Being forced into retirement could move you into a lower tax bracket, which could present some tax planning opportunities.
5. Roth Conversions
One of those tax planning opportunities to consider are Roth conversions, which is the process of converting funds from your traditional IRA to a Roth IRA. While you must pay tax on the amount you convert, the Roth IRA earnings and distributions would be tax-free if you follow certain rules.
There’s an opportunity to do Roth conversions at a discount for the remainder of 2024 and 2025 if the tax rates within the Tax Cuts and Jobs Act sunset after 2025.3 Tax rates would revert to the higher rates from 2017.
If you are in a lower tax bracket after being forced into retirement, make sure you’re aware of the Roth IRA income limits. If you’re married and filing jointly, your Modified Adjusted Gross Income must be under $230,000 to make full Roth IRA contribution in 2024. You will still be eligible for a partial Roth IRA contribution if your MAGI is between $230,000-$240,000.
If you’re a single filer, your Modified Adjusted Gross Income must be lower than $146,000 to make full Roth IRA contribution in 2024. The phase-out range for single filers to make a partial Roth IRA contribution is between $146,000-$161,000.
The Two Roth IRA Five-Year Rules
There are two five-year rules for Roth IRAs that we want to make sure you’re aware of as well—one is for Roth contributions and the other is for Roth conversions. For Roth IRA earnings to be tax-free and penalty-free, the following requirements apply:
- The Roth IRA needs to be funded for five years prior to distributing any earnings generated within the account.
- You must attain age 59½ at the time of the distribution.
The 10% early withdrawal penalty comes into play for any earnings that are taken prior to age 59½ or if the IRA is less than five years old.
The same basis and earnings components apply for Roth converted funds. The difference in this case is that regardless of age, Roth converted funds must be held for five years taking withdrawals to avoid the 10% penalty.
The decision of whether to convert to a Roth IRA depends on several factors. Review our Roth Conversions Case Studies white paper to determine what you need to consider prior to doing a Roth conversion.
6. Optimize Your Social Security Claiming Strategy
Social Security is another income source that many people rely on during retirement. For someone who is forced into retirement, there could be a temptation to claim Social Security when first eligible at age 62. That claiming strategy could make sense if you aren’t in good health and don’t expect to live much longer.
However, the decision of when to claim Social Security isn’t just about you. Your spouse is a critical part of that decision. If possible, it’s important to consider playing the long game and delaying when you begin claiming Social Security. Remember that the longer you wait to begin claiming Social Security, the bigger your benefits will be.
Another thing to keep in mind is that when you or your spouse passes away, the surviving spouse only gets to keep the larger of the two benefits. That’s a key component of retirement planning for married couples.
7. Finding a Part-Time Job or Volunteer Position
One of the main takeaways if you’re forced into retirement is to have a plan for how you’ll fill the void of time that was previously occupied by your job. That’s critical to keep in mind regardless of your financial status.
So many people can’t wait to retire, but then don’t know what to do in retirement. Even if you are financially independent after being forced into retirement, the feelings of boredom and loneliness can take over your retirement if you haven’t planned for it.
Maybe there is a part-time job or volunteer position that you’ve always thought would be fun but didn’t have the time to do. What can you do in retirement to make it fulfilling?
What’s Your Next Step If You’re Forced into Retirement?
If you were forced into retirement, we hope these strategies can help you—especially the second one. Our team is ready to go to work for you and determine how to move forward. If you have any questions about your personal situation and how these strategies could help, start a conversation with our team below.
Forced into Retirement? Consider These 7 Strategies | Watch Guide
- 03:02 – Take Some Time to Reassess Your Financial Life
- 03:57 – Work with a Team of Professionals
- 07:09 – Make Sure You Have a Goals-Based Financial Plan
- 10:03 – Know Where Your Going to Spend From
- 12:38 – Roth Conversions
- 16:40 – Have a Strategy for Claiming Social Security
- 19:17 – Find a Part-Time or Volunteer Position
Resources Mentioned in This Article
- When Is It Time to Retire?
- The Fine Line Between Good Fear and Bad Fear
- Financial Stress: How Do You Deal with It?
- Why You Need a Financial Planning Team with Jason Gordo
- Life Experiences Beyond Work
- Components of a Complete Financial Plan with Logan DeGraeve, CFP®, AIF®
- How Much Do People Actually Spend in Retirement?
- Your Retirement Lifestyle: What Do You Want Your Retirement to Look Like?
- The Great Recession’s History Remains Relevant
- Dot-Com Bubble History Remains Relevant
- 5 Long-Term Care Questions to Ask
- Building a Disaster Preparedness Plan
- Planning for Uncertainty in Retirement
- Starting the Retirement Planning Process
- What Is a Monte Carlo Simulation?
- Reasons People Run Out of Retirement Money
- Don’t Retire without Doing These Things First
- Can I Retire Early? Becoming Financially Independent
- Reviewing Your Retirement Checklist
- How to Spend When You First Retire
- The IRA Early Withdrawal Penalty: How to Avoid the 10% Penalty
- How Does a 401(k) Work with Michelle Cannan, CPFA™, QKA®, QKC
- 5 Long-Term Strategies for a Better Retirement
- Taxation on My Investments
- What to Do with Your 401(k) After Retirement
- 2024 Tax Brackets: IRS Makes Inflation Adjustments
- Tax Planning Tips with Corey Hulstein, CPA and Martin James, CPA, PFS
- Roth Conversion Decisions for 2024
- Roth Conversion Rules
- How Does a Roth IRA Grow?
- What If We Go Back to Old Tax Rates?
- Tax Rates Sunset in 2026 and Why That Matters
- 2024 401(k) and IRA Contribution Limits
- Taxes on Roth IRAs
- The Roth IRA Five-Year Rule
- Maximizing Social Security Benefits
- Retiring Before 62: What You Need to Consider
- Social Security Benefits for a Surviving Spouse
- Couples Retirement Planning: What You Need to Know
- Benefits of Volunteering in Retirement
Downloads
Other Sources
[1] https://www.eeoc.gov/statutes/age-discrimination-employment-act-1967
[3] https://taxfoundation.org/blog/tcja-expiring-means-for-you/
Investment advisory services offered through Modern Wealth Management, Inc., a Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management a Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.