Mitigating the Financial Risks of a Forced Retirement
An early retirement is a celebratory event when it happens according to your timeline. But it can also be a financial wrecking ball when you’re forced to retire prematurely — something many Americans experienced during the COVID-19 pandemic.
Indeed, more than 3 million additional workers in the U.S. retired during the pandemic than is typical, according to a Federal Reserve Bank of Saint Louis analysis, which found “a significant number of people who had not planned to retire in 2020 may have retired anyway because of the dangers to their health or due to rising asset values that made retirement feasible.”1
But it’s not just a global health crisis that can induce an early retirement. Injury and illness are among the most common reasons that cause a forced retirement. Some on the cusp of retirement lose their jobs and choose to sit it out for good when their employer downsizes or their skill set becomes obsolete. And others stop working before they intended to care for an ailing loved one.
Indeed, those who are forced into early retirement early need to consider the following potential financial risks:
- Longevity risk
- Health insurance coverage
- Inflation
- Sequence of returns risk
Taking steps to manage these risks as early as possible is a must. For guidance, many turn to a financial professional.
Longevity risk after a forced retirement
Those who stop working before their normal retirement age are far more vulnerable to longevity risk — the likelihood of outliving their assets — because they must stretch their savings out over a greater number of years. They also have fewer working years to contribute to tax-deferred retirement accounts, so they start off with less in the bank.
As a general rule of thumb, financial professionals often recommend a 3 percent or 4 percent withdrawal rate during the first year of retirement. Retirees can then adjust that amount higher annually to keep pace with inflation.
Assuming their investment portfolio earns more than 4 percent on average per year, that withdrawal rate ensures that they will only ever spend their earnings and leave their principal untouched.
Early retirees, who need their savings to last longer, may need to learn to live on less. They may also need to reduce their expenses by downsizing to a cheaper house or simply return to work (even part time) for a few extra years to bolster their retirement nest egg.
Those who have the means can also potentially delay claiming Social Security benefits a few extra years to permanently increase the size of their future Social Security checks — the best way to give yourself a raise during retirement.
Health insurance coverage after a forced retirement
Many early retirees underestimate the potential cost of paying for private health insurance during the years before they become eligible for Medicare, the federal health insurance program covering those age 65 and older, certain younger people with disabilities, and those with end-stage renal disease.
Premiums for private health insurance, even for a few years, can consume an oversized portion of your savings, which could undermine your ability to make ends meet throughout retirement.
Options for coverage include COBRA, a spouse’s insurance, retiree health insurance benefits, the public marketplace, private health insurance, membership-based group health plans, and Medicaid for those with demonstrated financial need.
Long-term care (LTC) insurance coverage, which picks up where Medicare leaves off, can potentially curb future costs related to assisted living and nursing home care. Some hybrid life insurance policies include LTC coverage.
Before buying an LTC insurance policy, retirees should speak with a financial professional to determine whether such coverage is the right fit for their family.
Inflation
The rising cost of goods and services, otherwise known as inflation, is enemy number one for retirees.
When you no longer produce an income, any increase in consumer prices erodes your purchasing power. And the more years you spend in retirement, the bigger that threat becomes.
Historically speaking, inflation rises from 1 percent to 3 percent per year. Assuming 3 percent annual inflation rate, a 55-year-old making $50,000 per year who retires today would need the equivalent of about $91,000 by age 85 to maintain the same standard of living.
Inflation, of course, doesn’t always remain within the federal government’s target range. In early 2022, the Consumer Price Index soared to 7.5 percent, the biggest spike in consumer prices since 1982.
Retirees typically scale back their level of investment risk because they depend on their retirement savings for income and can’t afford a period of prolonged losses. While that may be age appropriate, it is also a risk to become too conservative with their asset allocation.
Sequence of returns risk
New retirees, regardless of when they leave the workforce, must also be mindful of market performance.
Those who retire into a bear market, or experience losses or low returns in the early years of their retirement, are statistically far more likely to outlive their savings than retirees who experience losses later on.
Indeed, while permanent life insurance policies are primarily designed to provide a death benefit to protect the ones you love, they also build cash value as premiums get paid – and you can borrow from your cash value for any purpose.
For example, retirees can use their cash value to pay the bills when the market is down, giving their investment portfolio time to recover.
Another way to offset sequence of returns risk is to create a traditional emergency fund worth at least 12 months of living expenses in a liquid account, such as a savings or money market account, from which retirees can draw an income during periods of market downturns.
Conclusion
It’s one thing to plan for an early retirement, but quite another to be forced out of the workforce prematurely. With careful planning, professional guidance, and tools to mitigate multiple risk factors, however, it may still be possible for early retirees to live the lifestyle they had envisioned.
Provided by Matthew Clayson, courtesy of Massachusetts Mutual Life Insurance Company (MassMutual). CA Insurance License # 0I01304
©2023 Massachusetts Mutual Life Insurance Company, Springfield, MA 01111-0001
MM202611-307408
7 Ways You Might Be Sabotaging Your Salad
Salads may not be as American as apple pie, but plenty of people report eating them regularly: four times a week, on average, according to a poll commissioned last year by Fresh Express and conducted by OnePoll. More than half of the 2,000 U.S. adults polled — 62 percent — said that salads are part of their regular diet.
It’s a little puzzling to reconcile those numbers with the staggering rates of obesity in this country, but then, the health value of a salad really depends on quality rather than quantity. While salad — usually conceived as a big bowl of fresh, raw vegetables and leafy greens — has all the makings of a terrific health food, it’s easier than you might imagine to go astray and sabotage your salad. Pouring on the dressing, overdoing the carbs, forgetting about protein, and other common missteps can turn this nutritious meal into a calorie bomb.
Whether you’re ordering out or tossing your own, here are seven common mistakes to avoid.
- Mistake 1: Forgetting Protein
- Mistake 2: Drowning in Dressing
- Mistake 3: Packaged Dressings
- Mistake 4: Going Crazy on the Croutons
- Mistake 5: Boring Bowls
- Mistake 6: Using Light Greens
- Mistake 7: Not Cleaning Around Your Greens
The Magic Formula for a Winning Salad
Now that you’ve learned what salad mistakes to avoid, here’s how to do it right! Cassetty shares her formula for building a satisfying, substantial, nutrient-dense salad. Combine the following:
- Two parts veggies, which could be leafy greens; chopped peppers, cucumbers, or tomatoes; or roasted veggies
- One part carbs, such as quinoa, brown rice, sweet potatoes, butternut squash, or dried or fresh fruit
- Protein, such as eggs, beans, legumes, or tofu
- Fat Cassetty encourages plant-based sources of fat such as avocado, olives, or an oil-based dressing. Cheese works well for certain salads — think beets and goat cheese or a Greek salad with feta.
- Crunchy bits Nuts, seeds, or crunched-up whole-grain chips or crackers
- Flavoring Along with dressing you can add enhancements like Italian, Greek, or everything-but-the-bagel seasoning.
How much of the protein, fat, and crunchy bits should you add? “The amount that would feel comfortable and enjoyable,” Cassetty says. “Think about the fat source as an accessory — it gives your salad lots of flair, but you don’t want to overdo it,” she says. “And protein is a filling element, so how hungry are you? When we base our decisions like that, we’re tuning into our bodies, and that helps us eat more in line with what our bodies need.”
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By Stephanie Thurrott (March 2023)
Income tax diversification defined
If you’re saving and investing for retirement, you’re probably familiar with the concept of investment diversification: Combining different types of assets to balance your overall investment risk and return. This same principle can and should be applied to income tax diversification.
Why? Income tax diversification may allow you to structure withdrawals in retirement to potentially increase the amount of after-tax spendable income.
To achieve a diversified tax base, you want financial assets that offer different types of income tax advantages as you:
- Save for retirement (Contribution).
- Grow your savings (Accumulation).
- Use them for retirement income (Distribution).
There are particular income tax advantages offered by different financial instruments at each of these stages.
Choosing options that offer tax advantages during these different stages may help you accumulate more for retirement and reduce your income tax liability during retirement.
Retirement savings plans (pretax contributions, tax-deferred accumulation, taxable withdrawals)
As you earn money, you pay income tax. But certain retirement savings programs — 401(k) plans, IRA’s, and some types of pension and profit-sharing plans allow you to contribute on a pretax basis. This effectively lowers your gross pay and, as a result, the taxes on that income.
Additionally, many employers offering these types of plans offer some kind of match of funds to a certain limit. For example, your employer may contribute 50 cents for every dollar you contribute up to 6 percent of your pay. So, if you contribute 6 percent of your pay, then add your employer’s match, your contribution amount is effectively increased to 9 percent.
The pretax income you invested in these types of qualified retirement accounts grow on a tax-deferred basis, meaning the money doesn’t get taxed until you take it out.
These kinds of plans are typically subject to a 10 percent penalty for distributions prior to age 59½, and may also have annual required minimum distributions (RMDs) starting at age 73. Failure to take full RMDs will result in a penalty tax equal to 50 percent of the shortfall.
Roth plans (after tax, tax deferred, tax advantaged)
Roth IRAs and Roth 401(k)s are built with after-tax dollars. Both earnings and withdrawals are income tax free if the owner is 59½ and has had the account for five years or longer.
Contributions are limited, however. Those making more than a specific income level cannot contribute a Roth IRA. And those do qualify can only contribute a set amount. Roth 401(k)s don’t have income thresholds, but have limits on how much can be contributed.
Roth account values may also pass tax deferred to the account beneficiary at death.
Annuities (tax deferred, tax advantaged)
An annuity is a contract with an insurance company that can protect you from the risk of outliving your savings in retirement. It is purchased in a lump sum or series of payments and guarantees a stream of payments at some time in the future.
There aren’t any statutory limits on how much after-tax money can be used to fund an annuity, although the annuity itself may have contractual limits.
Earnings in annuities accumulate tax-deferred. When you start receiving payments, you’ll be taxed. If the annuity was bought with pretax funds, the payments will be taxed as ordinary income. If purchased with after-tax funds, you would only pay tax on the earnings.
Life insurance (after tax, tax deferred, tax advantaged)
Life insurance provides a death benefit to help your loved ones carry on in the event of your passing, and life insurance death benefit proceeds are generally income tax free.
Some types of life insurance build cash value. This cash value grows on a tax-deferred basis.
The cash value can be accessed on a tax-advantaged basis. Money taken from the cash value of a life insurance policy is not subject to taxes up to the “cost basis.” That’s the amount paid into the policy through out-of-pocket premiums.
Policyowners can withdraw or borrow against their cash value for any need, like paying a college bill or coming up with a down payment on a house. Retirees can use the cash value as a ready reserve of funds for inevitable market pullbacks, allowing time for invested funds to recover.
Municipal bonds
Those looking to diversity their tax base also sometimes look at municipal bonds.
The attraction of municipal bonds is the interest earnings are not subject to federal taxes. They may also avoid state and local taxes if the investor lives in the state that issued the bond.
Conclusion
The kind of income tax diversification mix using the various options will be different from individual to individual, depending on age, income, and other circumstances. Many people turn to a financial professional to help them understand the choices and possible outcomes.
Provided by Matthew Clayson, courtesy of Massachusetts Mutual Life Insurance Company (MassMutual). CA Insurance License # 0I01304
©2023 Massachusetts Mutual Life Insurance Company, Springfield, MA 01111-0001
MM202611-307408