McMahon tips on how to prepare for unexpected retirement

04.15.2016

Nasdaq: “Let’s Get Serious About Preparing For Unexpected Retirement” by Paul Katzeff on Invester’s Business Daily Apr. 01, 2016 7:43 p.m. ET

Let’s Get Serious About Preparing For Unexpected Retirement

Talk about boom and bust. Pittsburgh-registered investment advisor Chris McMahon tells of two friends with sweet jobs as managers of water pipeline construction for energy drilling projects in the Marcellus Shale.

Then the Sword of Damocles fell upon his friends, one 35 years old and the other 46. “Yesterday they laid off 50 people, including them,” McMahon said. That scene has played out countless times since the Great Recession and continues today. Are you ready for that?

So let’s get serious! In today’s economy, it’s best to be prepared for early retirement, no matter what age you are, what job you hold, what your profession is. How do you prevent an unexpected layoff from throwing your life, the retirement plans you thought you had, into a tailspin?

And losing your job before you’re ready is not the only concern. Many confess to having not saved enough. Many fear outliving their savings. Sixty-two percent of workers expect to work in retirement, according to Voya Financial. Many need the income or activity or sense of purpose. But only 10% of retirees actually manage to find a job.

And 58% were very concerned that being forced to retire earlier than expected would mean a cut to their Social Security benefits.

Fortunately, there are real-world steps you can take if you’re behind on saving enough. They boil down to:

  • Boost your savings.
  • Delay retirement.
  • Cut spending.

But, wait! Your eyes are rolling. You say you can’t afford a big increase in your savings? Even a small increase helps a lot.

Look what happens if you hike your savings rate by 1 percentage point to 5% of your $50,000 pay. With a 7% average annual rate of return, after 30 years you’ll inflate your nest egg to nearly $253,000, up from about $202,000 with a 4% savings rate, says DST Retirement Solutions.

And increasing your savings by as little as 1, 2 or 3 percentage points can lead to additional benefits. In a 401(k) plan, your employer likely will match your increases up to a certain point. As Aparna Narayanan explains in a report about workplace retirement plans in this special section, that’s like giving yourself a pay raise.

There’s more that you can do to help yourself. If you’re 50 or older, plans like a 401(k) and IRA will let you make additional yearly catch-up contributions, as Larry Carrel details in his special section report about calculating savings.

Also in that report, T. Rowe Price financial planner Stuart Ritter explains the five bonuses of delaying retirement, including more years of potential compound growth for your nest egg. And you may end up boosting your Social Security benefits by about 8% annually for each year you put off the start of collecting checks.

As for cutting your expenses, financial planners McMahon and Greg Hammer, president of Hammer Financial Group, in northwest Indiana, spell out later in this report how affordable, practical steps can put thousands of dollars back into your own pocket — or free them up for your retirement savings.

Be Prepared

And what about an unexpected lay-off? How should you cope? How can you prepare ahead of time?

Financial advisors emphasize a number of steps you should take. In another report in this special section, Morey Stettner describes how to find a financial advisor that’s right for you. Meanwhile, here are 10 tips for making sure you land on your feet in case you get hit with an unexpected pink slip.

 

  • Figure out your income. Will you have enough money to afford the lifestyle you expect? That’s a key challenges, whether your retirement is planned or unscheduled.

So before you head for the exit, get a handle on what your resources are and how much income you can safely milk them for in retirement.

Get an estimate of your Social Security benefits at ssa.gov. Tote up any pension income you expect.

As for income from retirement accounts, one common strategy is to aim to withdraw 4% a year. If the growth stocks in your portfolio grow by at least that much each year, you should be in good shape for decades, even without boosting your payout for inflation annually. The “4% rule” is a good starting point. You can adjust this later if necessary.

 

  • Make a budget. Once you determine what your retirement income would be without taking additional steps, such as continuing to work and socking away more income, get a handle on how much money you’ll need.

List how much you’ll need to cover mandatory expenses such as food, housing and health care. List how much you will need for discretionary spending on such things as entertainment and travel.

This will show you whether you’re on track to afford retirement, or if you need to scale back your retirement lifestyle or must work to earn more money.

If an advisor prepares a plan for you, make sure it includes a one-page summary in plain English. “It should spell out where you are today, where you will be tomorrow, things you can control, things that are hard to control and things you can’t control,” said Steve Cordasco, senior financial advisor at Cordasco Financial Network, in Philadelphia.

 

  • Seek unemployment compensation. You may be entitled to unemployment insurance benefits if you’re laid off. You may also be entitled to severance pay from your company.

“So don’t voluntarily ‘retire’ to save face,” said James Nichols, head of the customer solutions group for Voya Financial. “That could make you ineligible for unemployment compensation and severance.”

 

  • Network. If you are under age 35, you are already plugged in to social media. If you’re older, ask your kids how to get started or expand your activities. If you don’t have kids, hire a friend’s kid or join a local adult-ed class.

There are additional ways to network. Your college alumni association can be a rich source of contacts and encouragement.

McMahon’s two pals who got laid-off? Within days, both landed new jobs with former competitors — even amid ongoing layoffs in their industry — without taking cuts in their salaries of about $200,000. How? “They were always active in their industry associations, even though that was nonpaying work,” McMahon said. “So everyone knew these guys, liked them and wanted them.”

 

  • Dress for success. “Keep your wardrobe current,” McMahon said. “You don’t have to dress to the nines. Just keep your clothes contemporary.”

Look good, so someone would want you in their offices, he adds. And try to stay fit. Give the appearance of energy, excitement and being connected with things going on in the world.

 

  • Keep skills current.Take advantage of instruction offered at your current workplace. Check out adult-ed classes and courses for alumni at your old college. You can learn everything from computer skills to welding.

“And buff up your old job skills,” McMahon said. No harm in landing work doing your old job — it’s a paycheck and a foot in the door. “Then you can prove yourself to your new employer and move up the ladder to your old job and higher pay,” McMahon said. “It also shows your flexibility, which employers like.”

 

  • Think outside the box. Afraid you can’t find a job in your field? Consider sales in your own or some other line of work.

Sales jobs can be plentiful because so many people are afraid of the job. As an alternative, consider finding work as an independent consultant if you can’t find a full-time job.

 

  • Job hunt now. Don’t wait to become unemployed. Check job listings. Network. Look around.

“It’s much easier when you don’t need a job,” Hammer said.

 

  • Save for a rainy day. Now, before the ax falls, is when to start. Aim to set aside enough to cover three to six months of household spending.

“This also reduces pressure, so you won’t make a rash job decision,” McMahon said.

 

  • Cut spending. Businesses routinely trim costs. You can too. “You don’t need all of the things you think you do,” Hammer said. Cars and vacations are big-ticket items that you can spend less on.

If you don’t need the savings just to make ends meet, plow some or all of the savings into your retirement savings, Hammer says.

McMahon helped friends cut $35,000 in annual spending by cutting back on youth hockey and family travel. “One client was spending $2,100 a month on private tennis lessons and camps for his kids,” he said. “He saved $800 a month by switching to group lessons. And his kids were the only ones in the class anyway!”

Are you in a country club or golf club? “I had a client switch to social status from a full membership,” McMahon said. “That cut his yearly fee to $14,000 from $40,000. And he could still take clients golfing there three times a month, which is more often than he goes anyway.”

McMahon added, “Preparing in advance is the best way — hey, it’s often the only way — to make sure you can land on your feet in the event of unscheduled retirement.”

 

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