STOP! Your Money, 401k, and Unexpected Early Retirement

401k and early retirementAre your savings, IRA, and 401k plan enough?  The American dream is to retire early. Who wouldn’t want to put work behind them and spend their days traveling, with friends and family, participating in hobbies, and relaxing? In the past, early retirement was an option for those in good financial standing. Most considered it a reward for good saving and careful planning. Today, due to the coronavirus pandemic, many Americans are being pushed into early retirement. For some of those individuals, it is more a nightmare than a dream.

Labor Costs

Even with the aid of government policies, many American companies are barely able to stay afloat due to the drastic reduction of demand for their products and services. They need to trim costs. One of the easiest ways to reduce costs is with layoffs. Unfortunately, the workers costing these financially strapped companies the most money are those who have been with the company the longest. Most are in their 50s. If you are one of those individuals, your employer may suggest early retirement or push for it. Yes, early retirement does sound nice, but is it right for you? What happens to and how does this influence your 401k plan?


First, take your age into consideration. Most individuals wait until they are between the ages of 60 and 65 to retire. This is when most can dip into their 401k plans, Individual Retirement Accounts (IRAs), and collect Social Security. If you are 52 years old, you may have planned to work for at least 8 more years. 8 years is a long time. Your plan was to work these years. You anticipated having a steady income and more additions to your retirement accounts, like your 401k.

One of your options is to take an early withdrawal from your 401k plan. Unfortunately, you may be charged penalties. There is a possibility of a 10% penalty for early withdrawals prior to the age of 59-1/2. However, there are a few exceptions.  The money in a 401k is tax-sheltered until used. For that reason, you will not only be charged an early withdrawal fee, but you must pay taxes on that money. How much does that leave you? A 10% early withdrawal fee may not seem like much, but it is money you are losing. Most importantly, since you are considering early retirement, you need to account for those added years. Remember, your plan was to work until 60 years of age. That leaves 8 years of life financially unaccounted for. How will you survive? It is crucial to plan your financial path before accepting an offer of early retirement.

Do You Have a Choice?

An employer can suggest early retirement, but you have the option to deny that request. However, the offer was made for a reason. As an older, long-term worker, the company’s costs are greater than recently hired employees. If you do not accept early retirement, the company may still decide to release you. However, this may give you an opportunity to collect unemployment and find a new job. If your new employer offers a 401k plan and has a solid program, you can do a rollover. Your funds and investments will switch hands. Continue working until you reach your planned retirement age and live off your retirement without the added risks and penalties.

The only instance in which an early retirement is an ideal option is if you are in good financial standing or if you are truly near retirement. Did you anticipate working for 3 more years instead of 8? If so, did you properly manage your savings and checking accounts? You may have enough personal savings to financially survive those 3 years, without dipping into your retirement accounts early.

Final Thoughts…

If you find yourself faced with unemployment or early retirement, take a step back and look at the situation as a whole. Don’t consider your wants; consider your needs. Yes, you want to leave stressful work behind, but can you afford to? If you are unsure, hold off on making a decision. You do not have to accept or deny early retirement immediately. All employers should give you at least a few days to make a decision. Speak to a financial advisor before making any important, life-changing decisions.

If you don’t completely understand how your 401k works, please read my short-read book, Investing for Beginners – Understanding Your 401k.

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