Early Retirement…a Nightmare or a Dream

The American dream is to retire early.  Who wouldn’t want to put work behind them and spend their days traveling, with friends and family, participating in hobbies, and relaxing?  In the past, early retirement was an option for those in good financial standing.  Most considered it a reward for good saving and careful planning.  Today, many Americans are being pushed into early retirement.  For some of those individuals, it is more a nightmare than a dream.

So, why the push for early retirement?  It is most common in the auto industry.  Many American manufacturing companies are barely able to stay afloat.  They need to trim costs.  One of the easiest ways is with layoffs.  Unfortunately, the workers costing these financially strapped companies the most money are those who have been with the company the longest.  Most are in their 50’s or 60’s.  If you are one of those individuals, your employer may suggest early retirement or push for it.

Yes, early retirement does sound nice, but is it right for you?  What happens to and how does this influence your 401k plan?

First, take your age into consideration.  Most individuals wait until they are between the ages of 60 and 65 to retire.  This is when most can dip into their 401k plans, Individual Retirement Accounts (IRAs), and collect Social Security.  If you are 52 years old, you may have planned to work at least 8 more years.  8 years is a long time.  Your plan was to work these years.  You anticipated having steady income and more additions to your retirement accounts, like your 401k.

One of your options is to take an early withdrawal from your 401k plan.  Unfortunately, you will be charged penalties.  There is 10% charge for early withdrawals taken before the age of 59 1/2.  The money in a 401k is tax sheltered, until used.  For that reason, you will not only be charged an early withdrawal fee, but you must pay taxes on that money.  How much does that leave you?

A 10% early withdrawal fee may not seem like much, but it is money you are losing.  Most importantly, since you are considering early retirement, you need to account for those added years.  Remember, your plan was to work until 60 years of age.  That leaves 8 years of life financially unaccounted for.  How will you survive? You better know before accepting an offer of early retirement.

An employer can suggest early retirement, but you have the option to deny that request.  However, the offer was made for a reason.  As an older, long-term worker, you are costing your company money.  You are paid more than recently hired employees.  If you do not accept early retirement, you may still find yourself in the unemployment line.  This does however; give you the opportunity to find a new job.

If your new employer offers a 401k and has a solid program, you can do a rollover.  Your funds and investments will switch hands.  Continue working until you reach your planned retirement age and live off your retirement without the added risks and penalties.

The only instance in which early retirement is an ideal option is if you are in good financial standing or if you are truly near retirement.  Did you anticipate working 3 more years instead of 8?  If so, did you properly manage your savings and checking accounts?  You may have enough personal savings to financially survive those 3 years, without dipping into your retirement accounts early.

If you find yourself faced with unemployment or early retirement, take a step back and look at the situation as a whole.  Don’t consider your wants; consider your needs.  Yes, you want to leave stressful work behind, but can you afford to?  You better.  If you are unsure, hold off on making a decision.  You do not have to accept or deny early retirement immediately.  All employers should give you at least a few days.

Speak to a certified financial advisor before making any important, life changing decisions.

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