As a person who has just taken early retirement through choice, I count myself fortunate. In these austere and worrying times, it is all too common these days for people to be “forced” into early retirement.
It is all very well to receive a lump sum settlement which can, depending on your circumstances, seem attractive. However, if the underlying raison d’etre remains the fact that retirement is retirement, regardless of it being early through choice or force, then reality may kick in sooner rather than later. The next year or two may be financially safe, but if caution and prudence are not strictly adhered to, then the settlement can sometimes be frivolously thrown away.
We have discussed before the “denominator” effect and how the calculation of “cash to the end” requires close scrutiny. However, if there is no prior warning of early retirement being thrust upon you and if, as a consequence of that surprise, you have not planned ahead, then choppy waters may be straight ahead.
It is often disturbing to plan for the worst. Many people think that by such talk, they may even entice the decision upon themselves, so they disregard the possibility. That’s not the best approach to be honest.
If pension plans have been built up throughout employment, and the pension payout has been configured to include future earnings and contributions, then the sudden halt could spell disaster. “I will get X amount when I am 65, so therefore I will be fine.” Then wham.
Much better to straddle the early retirement settlement over the years between now and actual age 65. Divide the amount by that number of years, and either take the amount as income year over year to age 65, or ensure that the funds are invested appropriately to produce the estimated income at age 65 and beyond, as previously calculated.
If alternative employment, even part-time, or on a much reduced scale, can be achieved to bolster the settlement then take it – providing that you are not committing yourself to a few years of purgatory just to squeak through. If you can get extra income without upsetting your sunset years until age 65 and beyond, then by all means, go for it.
Planning a doomsday approach of being thrust into early retirement too early may not be something that comes naturally to you … but, by NOT planning, or at least recognizing the possibility, could prove more troublesome. Once retirement i.e. the cessation of regular monthly income, hits home, then there is perhaps no way to go back and make amends. You may be stuck with the cash flows as of date of early retirement…. for life.
Run some numbers and see if your current pension plan could withstand early retirement, just in case it comes to pass. Go on, be bold.