Is It Really Early Retirement or Just a Layoff? Here’s How to Decide

You’re not far from retirement when you get laid off from your job. Here’s how to figure out if you’re ready for early retirement or if you should go back to the job market.

What to Do After a Layoff

A layoff is disheartening at any age, but with retirement in sight, it can be extra challenging. The first step is to take stock of your finances.

“Start by taking inventory of your financial and professional capital. How marketable are your skills? How much flexibility do you have in your retirement timeline?” says Joseph Boughan, a certified financial planner at Parkmount Financial Partners. “Review your emergency savings, projected retirement income, and living expenses.”

Once you have a complete picture of your finance, you’ll know how urgent or nonessential it is to get another job.

“This will help you determine how urgently you need to replace income—and whether you’re looking for a stopgap, a part-time job, or a fresh chapter in your career,” Boughan says.

How to Tell If You Can Retire Early

Maybe you’re not interested in getting another job or maybe you’d prefer to retire early. If so, you’ll want to check that you can afford early retirement.

Here’s how to tell if it’s an option for you:

• Start by calculating your monthly expenses: How will you pay for these expenses without working?
• Look over emergency savings: How many months of living expenses do you have saved?
• Review your income streams: What other sources of income do you have? Consider Social Security, pensions, annuities, and rental income.
• Analyze your investment portfolio: How much do you have saved up?

“Evaluate how much sustainable income you can safely withdraw from your investment portfolio. If you’re retiring earlier than planned, don’t overlook taxes and penalties tied to certain retirement accounts,” Boughan says.

For example, if you take money out of an individual retirement account (IRA) or 401(k) before age 59½, you may be on the hook for a 10% penalty. If you have enough money across your savings, income streams, and investments, you may be able to leave the job market completely and retire early.

“Once you have a clear picture of your financial situation, ask yourself how long your money would last if you stopped working today,” says John Abernethy, a certified financial planner (CFP) at Together Planning. “You may find you’re closer to retirement than you realized. Retirement doesn’t have to be perfect. It just needs to be flexible enough to work.”

If you think you may have enough money to retire early, it may be wise to get a second opinion by meeting with a financial planner. They’ll go over your finances and offer suggestions.

How to Handle Healthcare

Where should you turn for healthcare if you’re not yet old enough for Medicare?

“If you’re not yet eligible for Medicare, look into your state’s Affordable Care Act (ACA) Marketplace. These plans are comprehensive and, depending on your income, can be more affordable than you might think,” Boughan says. “If you’re temporarily living off savings or in a lower tax bracket due to the layoff, you may qualify for subsidies that significantly reduce your monthly premiums.”

Remember, the Affordable Care Act Marketplace doesn’t consider your investments or total net worth, only your income and family size.

“Many early retirees qualify for subsidies that make coverage surprisingly affordable, even with significant savings, because the subsidy is based on income, not net worth,” Abernethy says.

Other options for healthcare include severance packages, getting on a spouse’s health plan, signing up for COBRA, and going to a health insurance broker.

“Severance packages can include continuation of your health insurance for a certain period of time. This could possibly get you to Medicare age of 65,” says Dave Flegal, a certified financial planner and founder of Flegal Financial Planning. “If your spouse is still working, this is likely your most affordable option since employers generally help pay insurance premiums.”

Temporarily continuing the health plan you had with your employer is an option through COBRA, but it will be an expensive choice.

“While you were employed, your employer likely paid part of your premium and you paid part of it.  For COBRA, you must pay both the employer and employee premium, which is why it’s often more expensive,” Flegal says. “COBRA typically lasts for 18 months, but can be extended in certain circumstances.”

A final option is to find health insurance through an insurance broker. A broker has access to a wide range of health insurance carriers.

“More carriers are available compared to the Marketplace, and you’re likely to be able to find a plan that fits your exact needs, but they can also be more expensive,” Flegal says.

Job Searching After a Layoff

Should you head back into the job market so close to retirement? There are employment opportunities available for people approaching retirement age.

“While age discrimination is real, the labor force is shrinking as more baby boomers retire and fewer Gen X workers enter to replace them. That creates opportunity for experienced professionals willing to stay engaged,” Boughan says.

Target your job search to employers that will value your long work experience.

“Focus on industries that value reliability and institutional knowledge, and don’t underestimate the value of networking,” Boughan says. “Staying positive and proactive is key.”

The Bottom Line

A layoff in the years before retirement can be shocking, but it can also be an opportunity. Are you ready to retire early? A close examination of your savings, investments, and income streams may show you that early retirement is a viable option. For other people, a layoff means getting back in the job market as soon as possible, especially for those who don’t have a lot of money saved and have few income streams. This group of people may need to work longer and save more before they’re ready for retirement.