Coping with Forced Retirement

A recent survey conducted in the US showed that more than 1 in 4 over 50s fear that their age will see them forced out of their jobs if their employer decides to reduce staff numbers due to the economic downturn.

According to a new study by Sun Life Financial, more than 20% of American workers are forced into early retirement by layoffs, cutbacks, and shutdowns.

In The Bahamas we are experiencing the same reduction in the workforce due to the downturn in the economy. We are seeing the Government and private businesses offering early retirement packages to their employees who have reached early retirement age in an effort to ensure the viability of the organization.

A generation ago, a man or woman could go to work for a company, have a long and fulfilling career serving the organization loyally until the end of his or her career. The organization in exchange would provide some form of retirement/gratuity benefit that would be used to sustain the individual during retirement. Today, only in a few exceptional cases does the individual work for an organization for more than five to ten years, let alone stay until retirement age. In short, the era of the career employee is gone.

The problem with individuals who are faced with forced retirement is that many of them are not in a position to take early retirement let alone retire at all. For the most part, most of these individuals still have mortgages to pay and children who are still in school or university. The average mortgage is approximately 30 years. If an individual takes out the mortgage at age 30 and they forced into early retirement at age 50 or 55, the individual has approximately 5 to 10 more years to make mortgage payments from a considerably reduced post-retirement income.

Additionally, these individuals are usually given very attractive disengagement/early retirement packages. The problem now becomes, “what should I do with this large injection of cash?” The cash can be a nice added boost that can actually get you closer to achieving your financial goals if invested wisely, but what how you cope with early retirement in general? And what are the key issues to consider?

One of the biggest reasons individuals get into trouble when they hit an unexpected financial bump like forced or early retirement is that they continue to live exactly as they did before without adjusting their cost structure: . The same house payment. The same car payment. Most times, if you let your financial institution know your financial position, they are willing to make an arrangement with you so that you can continue to meet your obligations. The problem persists, however, If you still want the same luxuries you enjoyed while you were still employed.

Instead, you should immediately cut out all non-essential expenses, even if you think you can afford them. Sit down and budget out your finances to get an idea of where they truly stand. Put off your hair appointment, or as a grander gesture, sell that new car and replace it with a nice but used one. The key here is to ensure that you are not substantially cutting into your savings and burning through cash.

You may want to consider picking up a part time job just to keep your cash flow flowing and to protect your family. Whatever it is, you will want to protect your savings. The additional cash flow coupled with your reduced expenses reductions will help you to tread water financially for a while.

If you were fortunate enough to have a pension savings accounts try not to dip into it early because you are having a short-term cash flow crisis. If you take money from your pension savings account you would’ve lost all of the compounding you would have earned on those funds.

For example, if you are ten years away from retirement and you withdraw $25,000 from your pension account to make ends meet and pay off your debts, you will have lost approximately $72,000 in future cash. What will you get in exchange? You’ll get $25,000 in cash today. Which would you rather have? Pay your bills now and feel a little better with the $25,000 in cash or wait and have a lump sum of $72,000 that can support an income steam in retirement?

An individual who is forced into retirement should look at possibly getting medical coverage through their spouse’s employer. It will also be beneficial for the individual to look at disability insurance. The medical insurance will help protect you during the time you are trying to find a new job or career path in the event of a major medical or life tragedy and the disability insurance will protect you and your family in the event that you become seriously disabled. Basically, it replaces your income if you are unable to work as a result of disability which can help prevent your having to liquidate your investments and retirement savings accounts to pay for medical services or everyday necessities.

Many people view their work as an extension of their identity. It is difficult for them to separate their value and self esteem from that which they do on a daily basis. If your employer suddenly comes to you and says, “Thanks for your dedicated years of services, but we just don’t need you anymore,” it can be devastating.

The important thing is to view this as an opportunity. Did you want it to happen? Probably not. But you now have an opportunity to adjust your life and arrange it how you want: a fresh start.