Even if you make careful plans for your retirement years, there are several major problems you might encounter that could throw your entire retirement plan off track. Almost half (47 percent) of retirees left the workforce earlier than they planned to, often due to health issues, job loss or to care for family members, according to a 2013 Employee Benefit Research Institute survey. These five common problems can have a devastating impact on your retirement finances:
Forced retirement. Retirement plans often involve working and saving for retirement until you hit a target age or amount of savings. A layoff, buyout or business closure could toss you into retirement years ahead of schedule. Some 20 percent of people who retire early cite changes at their companies, such as downsizing or closure, EBRI found. "If you are forced into retirement three years early, that's three more years that you are not funding your 401(k) and three more years you are taking from it," says David Rosell, founder and president of Rosell Wealth Management in Bend, Ore. "So it exponentially has an impact on your financial future."
If you can't find another job or continue to build a nest egg, you may need to draw from your savings over a longer period of years and sign up for Social Security early, which will lead to smaller payments. You may need to reduce your expectations about your retirement lifestyle. "If you are used to a certain standard of living, it can be difficult to transition to more of a bare-bones budget," says Thomas Rogers, a certified financial planner and principal of Portland Financial Planning Group in Portland, Maine. "In the majority of cases, you are going to have to cut back, and that's a bitter pill to swallow."
Health problems. Health problems and disabilities are the most common reason people leave their jobs earlier than planned, and are responsible for over half (55 percent) of early retirements. Some retirees find they can no longer do physically demanding jobs, or develop conditions that require them to leave the workforce. Retiring early while at the same time encountering growing medical bills can easily begin to drain your retirement savings. Health insurance and a plan for long-term care are essential to avoid spending your savings too quickly.
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A family member who needs care. Some people end up leaving their job to help care for a spouse, parent or other family member who needs extra help. Nearly a quarter (23 percent) of early retirees left the workforce to help care for someone else. "Women will not only be the caretaker of their spouse at some point in their lives, but they also may be alone for a good number of years of their lives," says Mary Hunt, author of "The Smart Woman's Guide to Planning for Retirement." "Not only are we going to have to care for others, we are going to have to care for ourselves."
The death of a spouse. In addition to the obvious emotional toll, the death of a spouse can also complicate your retirement finances. If you were previously receiving two Social Security payments each month, you will now only get one that is equivalent to the higher earner's amount. Also, some pension and annuity payments could stop when the worker passes away if elections were not made to have payments continue for a surviving spouse. It's important for couples to make financial preparations for retirement that will last throughout both of your lifetimes.
Lackluster investment performance. A stock market dip in the early years of your retirement can have a devastating impact on your retirement finances for the rest of your life. "You need a diversified portfolio that provides enough exposure to the stock market that you will be able to keep up with inflation over the long haul, but not so much that you will find yourself panicking during the next stock market downtown," Rogers says. It's important to stress-test your retirement draw-down strategy to see what will happen to it if you develop a serious health problem or are forced into retirement early. The need for an adequate emergency fund doesn't end when you leave your job.