01How to Deal with Forced Retirement -
According to a new study by Sun Life Financial, more than 20% of American workers are forced into early retirement by layoffs, cutbacks, and shutdowns. In an age where pensions have gone by the wayside and the future of social security is in doubt, the report finds they often find themselves with half of the expected savings and investments they anticipated for their golden years. Reuters news service points out that the results weren’t entirely surprising: Half were the result of corporate actions with the second leading cause of forced retirement being injury and illness; it also said that family obligations were the reason ten percent of women left while only two percent of men.
In this step-by-step article, we’ll give you some great thoughts on how to deal with forced retirement. How to protect your investments, move forward, and start your new life.
The Old Paradigm of the “Company” Man or Woman is Dead
A generation ago, a man or woman could go to work for a company, have a long and fulfilling career loyally serving the enterprise. In exchange, he or she was provided with a comfortable retirement through the corporate pension system, steady pay increases, ample health benefits, along with a bevy of benefits that included assistants, free coffee, a cafeteria serving low-cost food, and other cost saving initiatives many workers didn’t fully appreciate. Today, in all but a few exceptional cases or industries, that experience is gone. This change is a result of “creative destruction”, a term coined in 1942 by economist Joseph Schumpeter.
02The Old Paradigm of the “Company” Man or Woman is Dead
Despite what you hear from a few factions of the media, these changes can actually be very good for the United States economy. The industries that were the most generous, it turns out, could hardly afford the largess they heaped upon employees. Now, the current generation is paying for those mistakes with corporate bankruptcies. In the airline industry, for example, many bemoan the former high salaries of the past. Yet, what they don’t realize is that the entire “family” if you were to think of the U.S. that way, is much better off – consider that flying across the country once cost thousands of dollars (that’s not even adjusted for inflation!). Today, businesses and families are able to travel virtually anywhere in the country for a fraction of the expense, resulting in a higher standard of living for everyone outside of the industry. (That’s not to say you can’t grow wealthy while working in such an industry. For more info, read Yes, Virginia, You Too Can Be Rich.)
Yet, the ramifications are clear: These productivity gains are going to be felt by companies. Who owns companies? That’s right – the individual shareholders; everyone from your Grandma to the local factory worker, and the high-powered lawyers on Park Avenue. If you focus on using your money to acquire ownership of America, Inc. you’re likely to do very, very well over long periods of time. If, however, you expect to be able to spend all of your income and still have the comfortable existence of the past, you are going to be sorely disappointed when you grow older as you realize that you are no longer able to work and you can’t pay your heating bill. The great thing about this country is that it comes down to individual choice. You can’t start on that journey until you finally concede, deep down, that the only one who can provide for your retirement is you.
03Adjust Your Expense Structure Immediately
The single biggest reason people get into trouble when they hit an unexpected financial bump is that they continue to live exactly as they did before without adjusting their cost structure. The same house payment. The same car payment. The same luxuries such as $4 coffees and designer salads at power lunch spots – whatever happens to be your individual indulgence.
Instead, you should immediately cut out all non-vital expenses, even if you think you can afford them until you can sit down and put pen to paper to get an idea of where you truly stand. Put off your hair appointment, try to walk or ride a bike if you don’t have to drive, and maybe sell that new car and replace it with a nice but used one. The key here is to ensure that your net worth doesn’t start to nose dive because you are living off of savings, burning through cash.
You may want to consider picking up temporary work in a lower paying job just to keep your cash flow healthy and protect your family. Consider becoming a checker at Wal-Mart or Home Depot; maybe open an e-commerce site to try to generate some cash through the web. Whatever it is, the goal here is not a career but to protect your balance sheet by earning enough that, when coupled with your expense reductions, results in you treading water financially.
04Dont Touch Your 401k! Seriously!
I don’t care if your house has burned down and you have gone through every dime of your savings – don’t ever take the money out of your 401k account early because you are having a short-term cash flow crisis. I’m going to say it: It’s STUPID. My apologies for being frank, but it comes from the same place of love as a father talking to his teenage daughter about the dangers of staying out late on prom night - we just want the best for you! Given that your withdrawals are not only going to be taxed at regular rates but have an additional ten percent penalty tax levied on top of them – not to mention that you’ve lost all of the compounding you would have earned in the meantime – and the true wealth foregone is absolutely staggering.
For example, if you are twenty years away from retirement and you withdraw $25,000 from your 401k to make ends meet and pay off your debts, you will have lost approximately $201,558 in future cash which could have generated nearly $1,000 a month in retirement income for you without ever touching the principal. What will you get in exchange? Assuming you’re in the 25% bracket, with the added penalty, you’ll get $16,250 in cash today. Which would you rather have? Pay your bills now and feel a little better with the $16,250 in cash or wait and have a lump sum of $201,558 that can support an annuity stream for life? Instead, famed financial planners such as Suze Orman have recommended you open a credit card that has zero-percent interest for an extended period of time and live off of it until you can get another job. As long as you can take care of the bill before the interest rate reverts a higher level, you’ll end up with far, far more money in the long-run. That’s more money to help make you and your family’s dreams come true.
05Dont Forget to Use a Rollover IRA
Building on our last point, it’s an enormous temptation for some people to just cash out of their retirement plan entirely. Again, that would be a tragic mistake in regards to your long-term financial success. Your choices are to rollover your existing 401k assets into a new so-called “rollover” IRA at a financial institution such as your brokerage firm or bank or deposit the funds into an existing IRA. The first option is generally the better of the two ideas because if your future employer allows you to bring your old assets from your previous company-sponsored retirement plan, you can simply transfer them into your new 401k plan after you’ve been hired. If you mixed assets, however, you’re out of luck.
Also, the best option is to have your employer roll the cash over directly into your new account. Otherwise, you’ll face a mandatory IRS withholding of twenty percent.
06Check Your Spouse or Partner’s Benefit Coverage
This one is short and to-the-point but it’s absolutely vital. Sometimes, you may be able to get coverage through your spouse’s employer. In addition to saving precious investment capital by lowering expenses, this can help protect you during the time you are trying to find a new job or career path in the event of a major medical or life tragedy. Ordinarily, your spouse or partner will simply have to check with the human resource department to find out which options are available to them and at what cost
One thing you may want to consider if not offered by your spouse’s employer is disability insurance. This will protect you and your family in the event that you become seriously disabled. Typically, there are two types of disability insurance: short-term which covers anywhere from two weeks to two years, and long-term which covers periods of more than two years. Basically, it replaces your income if you are unable to work as a result of disability, which can help prevent you from having to liquidate your investments and retirement accounts to pay for medical services.
07Should You Take a Buyout?
Often, in an effort to satisfy both the shareholders and their agents, the Board of Directors, who need to cut costs to save the company and / or improve performance while simultaneously avoiding painful layoffs, management will offer employees early buyout packages, enticing them to retire early in exchange for a predetermined level of guaranteed benefits such as a cash payment, lifetime annuities, etc. This is actually a great tool because it allows those who want to get out to do so at an above-average rate which, in turn, makes them happy while at the same time keeping as many employees as possible on staff that want to continue working. So, how do you know whether or not to take an early retirement buyout offer?
Ask yourself these questions …
- Do I love what I do? Am I showing up to work for something more than the money or am I mostly interested in a paycheck? If the answer is the latter, you might want to take the buyout and retire early.
- Could I find additional work fast enough so that the buyout can be added to my existing retirement accounts? The cash can be a nice added boost that can actually get you closer to your financial goals if invested wisely.
- How certain am I that if I do not take the buyout offer, I’ll be laid off anyway? Often, workers that do not take early retirement buyout offers and are laid off leave with a fraction of what they would have otherwise received had they elected to leave voluntarily. Unfortunately, this is merely a game of odds – do you have what the company is looking for by bringing specific skill sets that are not widely held by other staff? Would it be cheaper to eliminate your job and replace you with a lower paid employee? Are you in a financial position to take that risk? If not, you might want to consider the buyout offer and retire early.
08It’s Hard … But Don’t Take it Personally
This is the hardest part. Many people view their work as an extension of their identity. They cannot separate their own intrinsic value and self-esteem from that which they do; the painter gauges his success on the reception of his community, the opera star on the ovations shown by the audience during curtain call, the business manager on the profits he turns into his boss, and the factory worker on the quality of the product he produces. When someone suddenly comes to you and says, “Thanks, but we just don’t need you anymore,” it can be devastating on not just a financial level, but an emotional level as well.
The important thing is to view this as an opportunity. Did you want it to happen? Probably not. But you now have an opportunity to adjust your life and arrange it how you want; a fresh start. As long as you avoid the mistakes we’ve discussed – cashing out of your 401k, living with the same expense structure, staying out of the workforce while you look for the “perfect” job instead of taking something that generates cash in the meantime – you should be able to land on your feet. In the meantime, you may want to check out some of our other articles on retirement …