Because of the pandemic, many companies are trying to rapidly reduce their workforces. Boeing recently offered their voluntary layoff (VLO) to encourage employees near retirement to do so. Other companies will resort to traditional layoffs.
What should you do when you find yourself unexpectedly retired—whether voluntarily or not?
Assess the Situation—Review Your Numbers
Retirement is a major life change for everyone—even more so when it happens unexpectedly. The first step financially is to get a clear picture of your assets. This includes investment accounts and savings. It also includes debts like credit cards and mortgages. In addition, you’ll want to identify current or future sources of income such as pensions or Social Security.
Next, you’ll want to be clear about how much you’re spending. Free or low-cost tools like mint or YNAB can help you easily track how much you’re spending as well as categorize your expenses. That may make it easier to see if there are ways to reduce costs, if needed.
Knowing your minimum monthly costs is a major part of determining if you have the resources to retire successfully or if you need to find another way to work and earn money before retirement.
If you’re unexpectedly retired, identify if you need to reduce your expenses. Some of those reductions may happen automatically—most families aren’t spending as much on travel right now—while other reductions may require more planning.
You’ll want to account for healthcare costs. For some, employers may continue to provide health coverage until Medicare begins at age 65. For others, health insurance will have to be purchased either through COBRA to maintain the current health insurance or through the individual markets. These policies can cost significantly more than when the employee was working, although by carefully structuring income, it may be possible to get subsidies to reduce this cost.
Identify if you need additional sources of income. This may come from part-time employment. It may also come from reviewing your Social Security strategy. Social Security benefits can begin as early as age 62, although doing so will permanently reduce your benefit. Take time to compare the tradeoffs of starting your Social Security benefit at different ages.
Finally, review your investment allocation. You’ll want to make sure you have an appropriate percentage providing stability (cash, CDs, short-term bonds) to protect you from the fluctuation of the market when you need the money. With a retirement period of 30 years or more, stocks will likely be an important part of your investment strategy, too.
Do Some Tax Planning
It’s important to identify what mix of accounts you have. IRA, Roth, and taxable accounts are all taxed differently. It’s often best to spend from the taxable account first, then the IRA, and save Roth accounts for last, although there may be times where it’s better to use a mix from different types of accounts each year.
Many early retirees temporarily find themselves in a lower tax bracket because they don’t have a salary and they haven’t yet started Social Security. This may be a time to take advantage of Roth conversions. Moving money from a traditional retirement account to a Roth account now, while you’re in a lower tax bracket, can significantly reduce taxes over your lifetime.
Planning Beyond Money
When a major change like this occurs, it’s important to take care of your finances. It’s also important to take care of your mental health. Retirees often have years to plan for this major life change. Because of the pandemic, many are making this change suddenly and unexpectedly.
It’s essential to take the time to set a new routine and identify new hobbies or other activities to incorporate into your life.
When retirement is unexpected, it doesn’t have to be scary. Building a financial plan to determine if you’re on track to meeting your goals, to discern what adjustments should be made to help you reach those goals, then to execute that plan can help provide the peace of mind brought about by a successful retirement—even when it comes sooner than expected. If you want help with this process, reach out to us.
On April 20, Boeing announced a Voluntary Layoff (VLO) program in response to recent economic events. For employees who qualify, this benefit may be an opportunity to meet the goal of retirement sooner than expected. Are you wondering if you should take advantage of this program?
At Merriman, we’ve been helping Boeing employees navigate decisions like this for over 30 years. Here are the main points you should consider:
For eligible employees, Boeing is offering a lump-sum payment of one week’s pay for every year of service completed, up to a maximum of 26 years in most cases.
Employees who accept the VLO offer may also receive a few months of subsidized health insurance benefits and access to other benefits.
While employees who accept the VLO may apply in the future for open employee or contractor positions, accepting the VLO forfeits any first consideration rehire or recall rights. This program is used as a permanent separation from Boeing, causing the employee to lose those rehire benefits.
Boeing has announced the following important dates for this VLO offer:
April 27, 2020 VLO Registration Opens
May 4, 2020 VLO Registration Closes
May 14, 2020 Formal Notification Sent to Employees
June 5, 2020 Last Day on Payroll
Am I in a position to retire?
Many people may be considering the VLO offer but are unclear what retiring now would mean for their future lifestyle. This is a major decision to make in a short amount of time, and there are many factors to consider. What retirement lifestyle are you dreaming of? Are the assets you have saved enough? Will you have other income sources like Social Security or pension benefits? To help weigh your options, we’re offering a complimentary financial analysis for Boeing employees considering the VLO program.
Visiting the Social Security Administration (SSA) office likely does not rank high on a list of enjoyable activities. The inconvenience, long waiting times, frustration with trying to implement a filing strategy, and difficulty in filing for first-time benefits are all reasons it’s usually not a positive experience. We’ve found that no matter how much analysis and thought we put into helping you find the most appropriate Social Security strategy for your household, we can’t control your experience when you visit the SSA office to implement those recommendations.
To eliminate many of these headaches, you can use a filing service provided through Social Security Advisors. Instead of visiting the SSA office, a specialist can walk you through the online social security application while you’re sitting at home. All you need is a phone, a computer with Internet access, and 30 to 45 minutes of time.
What to expect
You can schedule a meeting on your own and pay the $100 filing service fee on the Social Security Advisors website, or do it during a review meeting with your Merriman advisor.
Social Security Advisors then sends a confirmation email that includes a GoToMeeting invitation. GoToMeeting, similar to WebEx and other online virtual professional meeting services, allows the specialist to share their screen while working through the Social Security application with you. When you click the invitation, you’ll be prompted to download the GoToMeeting software. You can dial in for audio, or use your computer’s speakers and microphone.
Once the specialist submits the application, they’ll email you a copy for your records.
As an extra bonus, if the Social Security Administration misunderstands the application or an error is made, Social Security Advisors continues to provide support until the issue is fixed.
What are the limitations of this service?
The online application does not work for clients filing for Social Security death benefits and dependent benefits. Dependent benefits come about when a parent who has dependent minor children passes away. These children and the surviving spouse are then eligible to claim a portion of the deceased’s Social Security benefits. For both of these cases, the applicant still needs to visit the SSA office.
Who is Social Security Advisors?
Social Security Advisors has been in business for seven years, helping clients maximize their Social Security benefits and implement various strategies.
Merriman does not have a relationship with Social Security Advisors and doesn’t provide guarantees of their services, but we’ve found that their services do help improve clients’ experiences with the SSA.
There are countless articles online on strategies for maximizing your Social Security benefits. Married couples have far more options than singles, and the rules are complex. If you are married and eligible (or almost eligible) for Social Security, it is worth talking to a financial or tax professional to ensure you weigh all of your options. In the meantime, this article from Kiplinger provides a nice primer on two of those available strategies: File and Suspend and Restricting an Application. It’s worth a quick read so you can come prepared to speak intelligently with your advisor, and thereby maximize your probability of a successful outcome.
The news media conditions us to think about our retirement savings need as a fixed number. At a recent graduation party someone told me they had $1.5MM saved for retirement,” and then came the big question: “Do you think that’s enough?” As a financial planner, this question has always perplexed me. With only that snippet of information, how in the world am I to know how much this person needs in retirement? The key is to know your “number” in the context of your goal-centric plan — not in terms of your demographic, neighbor or brother. So, let’s look at some factors that will affect your “number.”
1) Your cost of living. This is first for a reason. If you don’t have this figured out, take the time to work on it. There are numerous online tools to help you with it. The tool I often recommend to clients is Mint.com. The point here is simple: If you are going to spend $200,000/year in retirement, your nest egg needs to be much bigger than if you are going to spend $100,000/year.
2) Social Security. Just having this income stream will a lesser burden on your nest egg. The question is: How much less? The maximum figure you can expect to receive in today’s dollars is around $30,000 per year. Get a personalized estimate here. You can begin taking this benefit as early as age 62, or as late as 70, depending on your unique set of circumstances.
3) Other private and public pensions. Just like Social Security, these income sources will reduce the withdrawal burden or allow you to achieve a successful retirement period on a smaller nest egg. Pensions typically afford more flexibility than Social Security. One example is the single or joint life benefit option (read more on this from my colleague, Jeremy Burger, here). Another option is to take a lump sum. Your decisions on these options will have important implications for your retirement plan.
4) Distribution rate and portfolio allocation. 4% of your portfolio is generally considered to be a sustainable withdrawal rate. But what is your portfolio made of? A 60% equity, 40% bond allocation? How about 100% equity? Beyond that, how should you allocate the respective equity and bond components? These are important questions that you need to answer. Your advisor can help. One thing is for sure: With increasing longevity, you are going to need some long-term growth in the portfolio. And, since you will be distributing, you must shield your portfolio from the short-term volatility of the equity markets. The key is to find the perfect balance.
Having worked with hundreds of clients over the past several years, I can tell you that this is just the tip of the iceberg. Few people have the tools or know-how to coordinate all of this effectively, and one simple fact stated in the middle of a party is clearly not enough information to solve it all. If you’re not sure what your “number” is, be sure to ask an advisor for help.
My grandmother was born in 1927. At that time, the life expectancy for women was about 60 years, but here we are in 2013 and she is doing amazingly well. During the last 80 years, technological and medical advances have tacked another 26+ years onto her life. Already she has lived 50% longer than the initial expectation.
My son was born in the fall of 2012. He is expected to live about 80 years. Following my grandmother’s case, he would live to 120 years of age. Put another way, he can expect his pre-retirement and retirement periods to be about the same. Clearly, retirement nest eggs and pensions are going to be stretched a lot further than they ever have been.
This is the trend that we need to plan for. The following are key areas of consideration for our increasing life spans.
Inflation. At 3% inflation, a $100,000 annual income need today becomes $242,726 30 years down the road. This substantial difference requires careful consideration. Do your pensions have an annual cost of living adjustment built in? Have you built inflation protection into your retirement accounts?
Health care costs. Along the same lines, the estimated rate of inflation for health care in 2014 is 6.5%. Should you insure to protect against this risk?
Portfolio withdrawal rate. What is a sustainable rate that can last throughout your retirement period? Is your portfolio structure congruent with this rate? That is, do you have the appropriate mix of stocks and bonds with sufficient diversification?
Your end of life wishes. Statistically speaking, the majority of medical costs occur in the last five years of life. And, there is little doubt that advances in medicine and technology will afford increasingly difficult decisions. Having a clear medical directive can save significant emotional and financial resources.
Savings rate. Pensions are becoming a thing of the past. This has shifted a huge responsibility to the saver. If you are still in your accumulation years, figuring out the savings rate that corresponds to your retirement goals is more important than ever.
As life expectancies increase, so do the complexities of retirement planning. Inflation protection and an appreciable return that keeps up with your distribution needs are just the beginning. If you have not already done so, take the time to meet with your advisor to build a goal-centric plan that is specific to your unique retirement needs.