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4 Ways to Plan for an Unexpected Early Retirement

Author: Daniel Harris

Most people have a clear idea of when they plan on retiring, yet far too often they are forced to exit the workforce unexpectedly. In some cases, people retire early due to illness while some people are blindsided by a layoff or downsizing. With the likelihood of retirement coming before you planned a real prospect, it is important to prepare for the unexpected. From getting out from under debt to building an emergency fund, here's a look at four ways to be prepared if you're forced to retire early.

Get Rid of Bad Debt

When it comes to debt, there is good debt, and then there is bad debt. An example of good debt would be a mortgage with a low-interest rate attached to it. An example of bad debt would be a large credit card bill that's accumulating interest. To prepare for retirement, people have to work on paying down their bad debt. After all, if an unexpected circumstance leads you to retire early, and you are saddled with a ton of high-interest rate debt it will be challenging to fund your retirement while simultaneously making payments towards your debt. However, if you enter retirement with little to no debt then coming up with the money to live off of will be significantly easier than if you are burdened with loan and credit card payments.

Amass an Emergency Fund

Hand-in-hand with saving for retirement is creating an emergency fund that you can tap when the unexpected happens. While it's up for debate as to how much should be in an emergency fund, you do want to make sure you have enough saved to cover six months to a year of expenses. The more money you stockpile in an emergency fund, the better off you will be, particularly if you get hit with an unexpected retirement.

Curb Your Expenses

Working people often spend money on things that they would think twice about if their cash flow was more limited. Since that is often the case in retirement, curbing your expenses while you are still employed can help you establish a more frugal lifestyle for when you do retire. It's okay, to splurge now and then but if you are spending money each week on eating out, going to the movies or shopping, then you will want to evaluate your spending habits. It's also a good idea to look over your budget and make sure you could afford the fixed expenses like rent, utilities and food with less money coming in. If you can't, then you are going to have to identify additional ways to reduce your discretionary spending.

Maximize Your 401(K) Savings

Most employers in the U.S. offer their employees a company-sponsored retirement savings plan like a 401(k). These plans are attractive to savers because the money being contributed is tax-free. Employers will often offer additional incentives to help employees save by matching contributions up to a percentage. To get the most out of the 401(k) employees should be contributing at least enough to get the full match from their employer. An even better idea is to contribute the maximum amount that you are allowed each year. For 2015, that amount is $18,000 for people under the age of 50. People age 50 or older, are authorized to contribute an additional $6,000 in catch-up contributions.

The Bottom Line

In a perfect world, we would get to choose our retirement date, work until then, and then walk off into the sunset carefree. But in the real world countless people are forced to retire early for a multitude of reasons. Whether an illness forces you to retire, or you're laid off, preparing ahead of time for an unexpected retirement can go a long way in ensuring you can maintain your lifestyle in retirement. Paying down your bad debt, maximizing your 401(k), curbing your spending and tweaking your budget, are all great ways to make sure you are prepared if the unexpected does end up happening.

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