Planning for retirement? If you are not, you should be. What's becoming increasingly clear in the post-financial-crisis economy is that many people are unable to plan just when or how they'll leave the workforce.
In the midst of the financial crisis, baby boomers responded to money pressures by vowing not to retire, and some forecasts saw the post-55 work segment poised for huge growth. Pew Research reported in 2009 that 60 percent of people nearing retirement planned to work through retirement age. Other studies put that figure as high as 80 percent as the financial crisis raged.
But reality bit. Even people who wanted to work longer found they could not swing it. Among the first wave of baby boomers to hit retirement age, more than half (54 percent) quit working before they planned, according to MetLife's Mature Market Institute survey this year. "Boomers aren't necessarily 'working 'till they drop,' as was predicted," MetLife says.
The reason they are retiring? A majority of those polled say it was job loss or health-related issues. Still, many older workers say retirement is not a term they like, and many hope to work longer. Employment experts and financial planners see dangers in failing to come to grips with the reality of a workplace that can be difficult for older workers. Failing to deal with this transition carefully can lead to missteps and big costs in the long term.
Many still see a solution in part-time jobs, freelancing or finding unconventional work or new careers. In other words, they are hoping to "sort of" keep working in an economy that is "sort of" keeping people employed. But planning to make significant money later in life could be putting off the inevitable need to map out a sustainable exit strategy.
"People losing jobs and being forced into retirement have some homework to do – and they need to do it very quickly," says Maria Bruno, a senior investment strategist and financial planner for Vanguard. "Suddenly, you've gone to having no paycheck and you wonder, 'Now what do I do?'"
When you retire suddenly, it means doing practically the reverse of normal financial planning, she says. In careful life-stage-based plans, people consider far in advance how to fund their big life goals. In the case of a sudden, unforeseen retirement, it's more a matter of first figuring out how to survive without a salary.
"There were all these grand expectations that boomers would redefine retirement with huge numbers staying in the workforce, but there has not been that big of a change," says Sara Rix, senior strategic policy advisor for AARP Public Policy Institute. "People often say they feel a shock when that first paycheck does not arrive, no matter how much you have prepared for it. And a lot of people have done nothing at all."
The mundane first step is to add up expenses and create that elusive budget you never got around to finishing. It's the initial move in addressing what will likely be a longer-term challenge: There may be a period of weeks or months before Social Security or other pension funds can be tapped. How do you raise money to handle immediate costs?
Non-taxed bank accounts or emergency funds. If you are suddenly without a paycheck, it's probably best to use your emergency fund to cover expenses rather than raid higher-value, tax-deferred funds. "This is the time to use that emergency fund," Bruno says. "This is exactly what it's there for."
Sale of a home or other assets. Downsizing is a default choice for many retirees trying to manage costs. But it comes at a price. Real estate commissions, home improvements to your sale property, banking fees and moving expenses add up in a hurry, and a smaller home has to be significantly less costly to make sense, planners say. It can be a workable solution, but it takes time and planning, and creates short-term costs. So it's not much help in a pinch.