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How to Handle Becoming Jobless Too Soon

If you’re in your 60s, which savings should you tap into?


spinner image  Janice Young sitting at table with a bunch of papers on it
When Janice Young, 63, found herself suddenly unemployed, she quickly lowered her spending.
Caroline Yang

The Problem

You’re 60-something and suddenly out of a job. How do you stay afloat until you really want to retire? That’s what Janice Young, an interior designer near Minneapolis, needed to know. After losing her $100,000-a-year job last September, Young, 63 and divorced, began to doubt she’d find a new position that paid as well as the old one. Should she start taking a pension she was due? Draw from the $560,000 in her traditional and Roth IRAs? Claim Social Security on her ex-husband’s record? “I’m sure I’m not the only divorced woman in her early 60s who has these questions,” she wrote.

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The Advice

The first thing for Young to do was cut her spending. She’d left her job with a healthy-sized emergency fund, but it was dwindling fast at the rate of $4,500 a month. Some expenses, like her mortgage and car payment, were nonnegotiable. But she put a stop to discretionary home improvement projects, eating out, traveling and — reluctantly — charitable donations. She also contacted the Affordable Care Act (ACA) exchange to say she had no income; that would cut her projected $430 monthly payments to zero once her old health insurance ran out. All in all, Young lowered her monthly spending to about $3,000.

The second challenge was harder. If she wasn’t working, where should she start to pull money from? Any source she might pick — her pension, Social Security, traditional IRA, Roth IRA or a lower-paying job, if she could get one — would have consequences for her financial security, health care costs and tax burden. It’s complicated, says financial planner Wade Pfau, author of Retirement Planning Guidebook.

To explore different scenarios for Young, I also reached out to financial advisers Isabel Barrow of Edelman Financial Engines and Michelle Patello of TIAA. Here’s what they and Pfau recommended.

Grab the steady pension. Barrow found that waiting to take the pension wouldn’t result in a higher benefit. That gave Young two options: a $1,000 initial monthly payment that might possibly increase but never decline, or a $1,350 initial payout that could fall in future years if the underlying fund underperformed. Based on Young’s good health and expected longevity, Barrow recommended the $1,000 option.

Tap the traditional IRA. In general, the longer you can let a Roth IRA grow, the better, Patello explained, since withdrawals, unlike those from a traditional IRA, are tax-free. That said, Young would need to keep her taxable income under $29,160 this year in order to maintain free health insurance through the state of Minnesota. Given that she would already be drawing $12,000 from her pension but would also get the standard IRS deduction of $14,600, that meant she could pull $31,700 from her traditional IRA. After federal and state taxes, she would have a little over $3,200 a month — enough for her lower monthly needs. If she was hit with unexpected expenses, she could pull money tax-free from the Roth.

Find a job. The benefit would be huge, Barrow noted. Replacing even a fraction of her former salary, when combined with the pension, would allow Young to stop pulling from savings, leave the retirement accounts alone and delay Social Security, allowing her benefit to grow by up to 8 percent each year until age 70.

 

The Outcome

After months of job hunting, Young had good news. In late February, she landed full-time work as a kitchen designer at a home improvement chain — with a salary of about $46,000 and a health plan. She’ll tap her pension, because waiting won’t boost the balance, but she’ll put off Social Security until at least 67 and let her IRAs continue to grow. Young’s happy she has a plan to fall back on in case she’s jobless again. “I know I do have options,” she says. “I’m going to be OK.” 

 

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