The majority of us will at some point face the question of when it’s time to retire. And while the question seems like a simple one, oftentimes the answer is not so easy. And then there are times when the decision is made for you and you end up having to retire early with an unplanned income gap in your retirement.
A gap can occur at the beginning of retirement when you’re getting close to retirement but you have to stop working for any reason. For example, you may have planned to work until you are 65, but perhaps in a corporate restructuring, you’re offered a buyout at the age of 62. While the buyout may be a generous one, it may leave you short when it comes to your long-term retirement plan. Or perhaps a change in your health has left you unable to work the last few years. No matter what the reason, and there are many, most people don’t realize there are solutions available.
Andy S. Anderson, financial advisor with CUNA Brokerage Services, Inc., said when navigating through a retirement gap, it’s a complicated set of circumstances that includes one’s finances, social security, pension, Medicare, health care plans and supplements, family dynamics, and timing.
The key is with so many variables that can affect one’s situation, it’s important to create a plan that helps you manage your financial assets such as any cash, stocks, bonds CDs, 401Ks, mutual funds, and any additional resources such as social security and insurance.
Social Security can be an option but considering the timing is important. Most are eligible for social security starting at age 62. But waiting until 65 or event 70 to tap into your social security may have its advantages. The longer you wait the more your social security benefit may increase.
If your spouse is deceased and you were married for at least 10 years or more, many people don’t realize that at age 60 you can collect your deceased spouse’s social security as long as you haven’t remarried. This leaves your full social security benefits untapped.
Anderson pointed out that one big consideration when it comes to a gap in retirement is health care. More specifically, even if you’re set financially to meet your monthly financial needs and any other obligations, you also need to consider your health insurance, how and where it will come from and how you’re going to pay for it. This may be further complicated when the timing may be too early for you to apply for Medicare.
Anderson stressed that if you’re still working, it’s important to look at all documentation you receive from your company’s Human Resources Department. Health insurance may be an issue whether you lose your job or not.
Anderson explained that once you turn a certain age (ages can vary depending on company policy), you may be required to apply for Medicare while still on the job.
“Some employers require employees to apply for Medicare part A and B,” he said. “And some do not and allow the employee to wait. Allowing you to wait is a good benefit. So you should really pay attention to what you get in the mail from HR before age 65. Once you make the decision to leave your plan or your spouse’s plan really consider everything because once you go off the coverage you rarely go back.”
Also in the case of health insurance when your spouse is still working, you may be able to get on your spouse’s plan during the gap. But if that’s not an option, for now, you may qualify to fill the gap with health insurance and subsidies from the Market Place as part of the Affordable Care Act, but the future of ObamaCare is uncertain. If the Affordable Care Act is abolished or changed, perhaps lawmakers will create a new option, but there’s no guarantee this will occur.
COBRA could also be an option, but COBRA can be pricey, and for those already on a tight budget, this option may be out of reach. Also COBRA is only temporary, usually 18 months. In some cases it can be extended, so theoretically, it could be a viable solution, but it all depends the timing of the gap.
Finally, one other gap to consider is at the end of retirement in the event you outlive your retirement income stream.
“On the other side you may have longevity and outlive your assets,” Anderson said. “Where will the money come from? What sources do we use and how can I make sure I don’t run out of money?”
Anderson said some 401Ks allow you to withdraw at 55, but you want to wait as long as you can to withdraw to let your assets grow.
If you have a 401K, you may be able to withdraw money as needed, but it’s important to keep in mind that your assets won’t grow or continue to grow at the same rate while you’re making withdrawals. This, known as the sequence of returns, can occur when an investor withdraws funds and earns a lower internal rate of return. The article, Sequence risk’s impact on your retirement money, by Dana Anspach, shows an excellent example of how this works and the impact it could have on your money.
And don’t forget other health care considerations during this time as well. Planning for long term care you need to ask yourself, based on your current cash flow, risk, income, and assets, do you need some additional protection for long term care that’s not covered through Medicare or your long term health care?
Anderson pointed out that under Medicare skilled care such as nursing is covered, but custodial care, those who may come in to help with day to day tasks and care, may not be covered after so many days.
When you’re looking at a gap in your retirement, the important thing to remember is a financial professional may be able to help you bridge that gap. So when you need help, contact your financial advisor so you can make the right financial decisions for your unique financial situation.
If you’re looking for someone to help you make decisions on situations like this one, Anderson may be able to help. Contact him at Andy.Anderson@cunamutual.com.
Have you or someone you know experienced a gap in retirement? How did you bridge the gap?