Any time a worker becomes unemployed during a recession, he or she may need to draw down savings or investments to cover expenses. That problem compounds for workers nearing retirement because they have fewer years ahead to recoup those savings.
Financial advisors need to help these clients with their retirement planning. A job loss for a person nearing retirement may result in cuts to lifestyle expenses or downsizing the dream for the golden years. In fact, workers over age 55 may be at greater-than-average financial risk due to the current economic downturn, according to a recent report.
A report from the Schwartz Center for Economic Policy Analysis at The New School found that 2.9 million workers ages 55 to 70 have left the labor force since March.
"These workers are at risk of having to retire involuntarily due to increased health risks coupled with decreased job prospects," according to the study.
Researchers note that if these exits continued at the same pace over the ensuing three months, an additional 1.1 million workers in this age group may leave the workforce. That would be a total of 4 million people potentially pushed into retirement due to the pandemic's related economic downturn.
Health Concerns Among Reasons
Charisse Mackenzie, president of Saturn Wealth in Gilbert, Arizona, says many of her clients chose not to return to the workplace due to fear of contracting the coronavirus.
"Several of them found that they did not want to commute anymore and did not want to return to the office in person," she says. "Many clients were offered buyouts to encourage them to retire earlier than anticipated, which many accepted."
Jeannette Bajalia is the founder and president of financial planning firm Woman's Worth, as well as president of investment advisory Petros Financial Group, which are both based in Florida.
Bajalia sees regional differences among her clients when it comes to early retirement this year.
"We have offices from north Florida to central Florida, and what I'm seeing is that there are more forced retirements in the central Florida area," she says. "That region has been more impacted by COVID-19 because it's primarily a hospitality and entertainment industry, with Universal Studios, Disney and all surrounding hotels."
On the other hand, a number of her clients postponed a planned retirement because they felt less pressured during the work-from-home era. She cites commuting as a source of stress that was eliminated for many.
Of course, in any type of economy people have various reasons for deciding to retire or not. That's been true during the pandemic as well. It is important to realize that not all are affected equally by the virus, says Bob Kaye, wealth manager at Retirement Planning Associates in Sherman Oaks, California.
"Many employees or companies are affected little or not at all," he says. "Witness the highs of the current stock market as representing corporate profits. There is of course a percentage who are very affected and could lose their job or be laid off or furloughed."
He gave examples of employees in the restaurant or beauty industries who may be unlikely to take early retirement voluntarily, as they may have insufficient funds to cover retirement expenses.
Emotional Aspects Can't Be Overlooked
The retirement decision is generally emotional. Even employees who looked forward to retirement often miss the camaraderie of the workplace or the feeling of having a purpose.
Mackenzie says economic-related retirements may feel different than planned retirement, as there is a loss of control over the timing. Even if the emotional factors are different, the mechanics of retiring can remain the same.
"I really don't think this is different than any other early retirement situation," says Chad Ensign, founder of Ensign Wealth Management in Mesa, Arizona.
"It's just a reminder to start building a plan that has some flexibility and contingencies. There will always be unforeseen circumstances that arise that cause early retirement," he adds.
Ensign notes that over time, pre-retirees may face personal health challenges, widespread economic issues, domestic and geopolitical uncertainties and recession, among other concerns.
"It's similar to what I tell clients about trying to predict a market collapse," he adds. "Over the course of a 30-year retirement, the market will correct, go into recession, a pullback, whatever you want to call it. It will happen five to 10 times, so build a plan that accounts for that."
An "earlier than planned" retirement may bring challenges when it comes to income streams. For example, the earliest age to claim Social Security is at age 62. Outside of a few exceptions, such as a surviving spouse, a person who retires before age 62 doesn't have many options on that score and must plan appropriately.
Normally, an account owner must wait until age 59½ to make penalty-free withdrawals from an individual retirement account or a 401(k). The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, a $2.2 trillion economic stimulus bill passed by the signed into law in March 2020, allows penalty-free withdrawals through Dec. 31. That's if the account owner has been negatively affected the virus or the economic fallout. The withdrawals are still taxable, but account owners may spread the tax payments over three years.
Have a Plan for Social Security
Even claiming Social Security at age 62 may not be ideal, as the recipient is starting benefits before full Social Security retirement age. This means foregoing larger payments that would be available had the recipient waited. The largest lifetime benefit is available to those who wait until age 70.
A real financial danger for early retirees, Bajalia says, is foregoing these larger benefits if it's necessary to claim Social Security before full retirement age. It can also be a risk for married couples who are planning on survivor's benefits should the higher-earning spouse pass away first.
"Married couples need to be thoughtful about early claiming strategies and need to figure out how to get the most out of Social Security for the survivor," she says. "That's because you end up with only one check, and you want it to be as high as possible because the survivor gets an uglier federal income tax situation. So the problems have to do with the lack of adequate planning. Many individuals think about retirement planning as investment management, and these are two different disciplines."
Best Years Are Ahead
Even people pushed into a retirement they did not anticipate can stage a strong rebound, Bajalia says.
With longer life expectancies, she says, it may not make sense to retire at the traditional age, in any event.
"I personally retired at age 55 from a corporate career due to a downsizing the organization went through," she says. "I discovered a need for integrated retirement planning. That was 13 years ago when I started my financial planning career: a second career of purpose and passion, not to earn income or to save money. It was to serve others."
She advises her clients to think about their lives in a similar way. "The talent in the baby boomer generation is phenomenal," she says. "The best business ideas, the best business models and the best books are yet to be written by those who may have been forced out of the workforce prematurely. It's not the end, it's a new beginning."