The financial struggles of unplanned retirement

Monica wants to rest her tired, swollen feet. The 86-year-old retiree walks slowly to her old loveseat and sits down carefully. The purple paisley-patterned furniture has provided her with comfort for many decades. The loveseat is in fair condition but is showing its age. Once a part of a luxurious three-piece living room set; cardboard panels have since been placed under the seat cushions to prevent them from sagging. The aging cushions are doing double duty and serving as a storage drawer of sorts. In between the folds, everything from old bills, family pictures, junk mail, and prayer cards can be found. Two chenille pillows with matted fringes decorate both ends of the small sofa. The loveseat has seen better days. So has Monica. 16 years ago, not only was Monica forced to retire unexpectedly, she was not financially prepared for retirement at all.

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A survey by Transamerica Center for Retirement Studies found on average Americans are retiring at age 63, with more than half indicating they retired sooner than they had planned. Among them, most retired for health or employment-related reasons. 

In 2002, Monica's career as a nurse’s aide came to an end. (Monica’s name has been changed to protect her identity.) After suffering through pain for months, she was diagnosed with a herniated disc in her back. Monica received surgery, but never fully recovered. While she was 69 years old when she retired, Monica was not financially prepared to stop working. She did not have a pension or 401(k). Monica had very little savings to speak of. Social Security is her only source of income. Currently, she receives almost $15,000 a year in Social Security benefits; $12,000 less than what she earned when she was working.

“Retiring earlier than planned can have some serious implications for their overall financial situation in retirement,” says Catherine Collinson, chief executive officer and president of Transamerica Institute, a non-profit private foundation which includes Transamerica Center of Retirement Studies. “They are missing out on the income they would have earned up until their planned retirement. Also on retirement benefits that they would have received from their employers and accruing of Social Security benefits. It also means that they will potentially have longer retirements and will need to make their savings last.”

Monica remembers learning about the importance of saving when she was a young girl. She admits she dropped the ball when it came to planning for her retirement.

"I was negligent," Monica says sadly. "I was not informed. I was more concerned with my expenses and wanted to have more money in my pocket.”

According to the Transamerica Center of Retirement Studies survey, 17 percent of retirees who retired sooner than planned were “not at all confident” they would be able to maintain a lifestyle they considered comfortable throughout their retirement. Last year, Monica had to replace both the boiler and toilet in her aging home. While she was able to pay for the repairs, the unexpected expenses cut into her paltry savings.

Catherine Collinson of the Transamerica Institute says the best way to tackle retirement - whether planned or unplanned - is having a written financial blueprint.

“Where you stand in terms of your expenses, your sources of retirement income, how you are going to pay off debt if you have any as well as other factors,” she says. “Taking a financial look in the mirror and setting forth a plan is one of the most important things to do as you are heading to retirement. And as part of that plan, having a backup plan in the event you have to retire unexpectedly.”

On April 3, 2018, Linda LaBarbera received the phone call that changed her life forever. "We are outsourcing your work to India and your services are no longer needed, effective today," the voice on the other end of the phone line said. After working for the same computer manufacturing company for 31 years, Linda was suddenly let go. She was 64 years old.

“I was devastated, I really was,” she says emotionally. “I was angry. I was hurt. I was looking down the barrel of the gun of retirement, but I was not planning to retire until a minimum of 66.” 

Both Linda and her husband have a 401(k). Their home is paid in full.  She anticipates that their savings and investments will fund any needs for long-term care. Linda says while her husband planned well for their future, the unexpected retirement forced her to rethink her life plan.

“It’s not like we are starving or don’t have a home or anything like that,” she says. “But we did have other plans for before we retired and setting ourselves up a little better while we both still had jobs.”

Whether you have nothing saved for your golden years or you have millions of dollars in your 401(k) plan; Pierre Vogelbacher, wealth strategist marketing manager at PNC Wealth Management says the foundation of a solid retirement plan is a realistic budget.

“Most people are not adequately prepared for retirement,” he says. “The main reason is that most people don’t do a very good job of budgeting. That leads to them to not knowing what their expenses are. With their 401(k) for example, they see a number that is very big because they have saved for many years. Most seniors don’t actually understand what they are going to need to live on in retirement.”

Linda hasn't needed to dip into her 401(k) yet. She plans to start collecting Social Security when she turns 70, which will give her the maximum benefit. To earn money and keep busy, Linda has taken short-term contract editing jobs. She says she will only withdraw money from her savings if something catastrophic happens. Her husband’s salary is their main source of income. 

“I am used to going out and spending money on other people,” she says. “We are very generous with our family and friends who are not as well off as we are. So we take care of a lot of people. We can’t do that anymore. I can’t go out and be frivolous anymore. I do have to look at what we spend - what I spend.”

Vogelbacher says cutting costs is essential when living in retirement, especially for those on a fixed income. He suggests moving to a tax-friendly location if possible. Kiplinger ranks Alaska, Wyoming, South Dakota, Mississippi, and Florida as the top five tax-friendly states for retirees. If their health allows, Vogelbacher recommends getting a part-time job.  For those who own a home, he says paying off the mortgage is a smart financial move.

Monica’s only saving grace is that she paid off her mortgage in 2004. She says she wants to the spend the rest of her life in her home and would not consider moving, even to a tax-friendly state. Getting a job is not an option for Monica because of her poor health.

While retirees like Monica are getting by financially for the time being; Transamerica Institute highlights several key areas of vulnerability for seniors including low income, household debt, and poor retirement savings.

"Retirees are already living within limited means and risk outliving their savings," says Catherine Collinson of the Transamerica Institute. "How would they be able to cope with a shock such as long-term care expenses?"

Collinson says many people mistakenly believe that Medicare will fully cover long-term care expenses. Some seniors also hope that their children will take care of them as they age. Monica is divorced and hasn’t mapped out what will happen to her when she cannot take care of herself. She has two of three adult children she would have to rely on for help. When Monica is asked what will happen in her in the future, she is silent.

Monica is one of the 44 percent of unmarried persons who rely on Social Security for 90 percent or more of their income. At the beginning of 2019, Monica and more than 62 million Americans received a 2.8 percent cost of living adjustment from Social Security. The increase is the largest since 2012.

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With the Social Security hike, Monica’s monthly check climbed $33. Unfortunately, the new year also brought her a slight increase in what she pays for Medicare; along with a $500 property tax bill and the usual laundry list of monthly expenses.

"If you don't have much, the (Social Security) raise doesn't represent anything," she says with a dry laugh. "But it's good to get it."

Linda Bell joined FOX Business Network (FBN) in 2014 as an assignment editor. She is an award-winning writer of business and financial content.  You can follow her on Twitter @lindanbell