What to Do if You're Pushed Into Early Retirement by the Pandemic
Pilot, 62, shares insights after finding himself suddenly retired as coronavirus cripples air travel
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En español | The coronavirus outbreak has slowed life down for many people around the world, but for some, it's put them on the fast track to retirement. In fact, a preliminary study from the Becker Friedman Institute for Economics at the University of Chicago notes that, among people no longer in the workforce (meaning they're neither employed nor seeking employment), the number reporting that they are retired has risen from 53 percent in January to 60 percent in April.
Count 715 American Airlines pilots among those who have suddenly retired. In an effort to cut costs in the midst of this travel-stopping pandemic, American, along with Delta, United and others, began offering various leave options to employees in March. One offer, the Voluntary Permanent Leave of Absence (VPLOA), specifically targets pilots who are at least age 62. It awards selected volunteers full benefits and about 60 percent of regular pay, depending on how many hours the pilot typically flies, until they turn 65, the mandatory retirement age for pilots.
New York–based Capt. Anthony Goczalk was among the first to volunteer, though it wasn't his original plan to retire at age 62. On the contrary, he had just completed his training to move up the ranks and fly the wide-body 777 aircraft when COVID-19 concerns began grounding flights in the U.S. But once the leave offers were extended, he quickly changed plans. “Initially, I did not grasp it, but within a week, I came around and realized I've got to take this,” he says. “It was on my 62nd birthday that [the offer] came out. Was that a sign? I don't know, but it sure could've been."
Thanks to his financial education (he completed a certified financial planner program in 1994) and decades of careful planning, Goczalk has been financially ready for retirement for years. He originally aimed to hit his retirement savings goal in 2008 at the tender age of 50, and he succeeded. (Shortly after, however, his portfolio was hit hard by the last bear market and fell back below his goal.) But he hadn't really planned to stop flying at that point. “It's just that I wanted to be able to have that choice,” he says.
Now, that financial independence allows him to make this choice to take the VPLOA, stay home and prioritize his own health concerns over the need for a full paycheck.
Check your numbers
Of course, not everybody has that luxury of choice: Even before the recent spike in unemployment insurance filings, a third of Americans reported being within just three missed paychecks of having to either borrow money or skip bills, according to Northwestern Mutual's 2020 Planning & Progress Study.
Whatever your current situation, now is a good time for a financial checkup. Review your expenses, scan your bank and credit-card account statements, and identify any areas where you can trim back. “Everyone should be doing this, particularly because of the crisis we're going through right now, but for anyone who's looking at early retirement, it's imperative,” says Stacy Francis, Certified Financial Planner and president of Manhattan-based wealth-management firm Francis Financial. “You have to understand how much it takes to run your life."
Plan to fill the gaps
Once you have your expected expenses laid out, you need a plan to cover those costs. And unfortunately, not everybody is being offered leave packages as generous as Goczalk's from American Airlines. “We have clients in their 60s whose companies just filed for bankruptcy, so they don't even have a severance, not even one week or two weeks,” Francis says. “For a lot of people, it's like you're speeding down the highway at 60 miles per hour, and all of a sudden someone in front of you just slams on the brakes. It's not something you'd ever expect."
If you're one of the lucky few who have received some kind of voluntary leave offer, be sure you fully understand what is in it, including details on additional pay, health care coverage and retirement plan contributions. “What you need to understand is how it can potentially fill the gap between where you are today and where you had expected to be in order to retire in the future,” Francis says.
Health insurance was the key puzzle piece for Goczalk. American's VPLOA package allows the new retirees to continue receiving health coverage at active-employee rates. “That was the answer to my problems,” he says.
Otherwise, your options may be limited and costly until you're eligible for Medicare at age 65. You can stay on your former employer's plan typically for up to 18 months under COBRA, but you have to pay your employer's share of the premiums on top of your own. You might find a better deal than COBRA through your state's health care exchange, but Francis notes that some of the highest-quality plans come with high premiums.
Another strategy: Get a new job. While venturing out for work may not be advisable for everyone, especially for older workers who run a higher risk of experiencing the worst COVID-19 outcomes, you may be able to land a remote work-from-home job that comes with full-time benefits, including health insurance. You may still need to go with COBRA or a private option until you can find a new job, but at least you'd be able to limit how long you'd have to pay those potentially higher premiums.
Review your income sources
Working in retirement can help fill the gaps in your income, too, whether full-time, part-time or in a freelance capacity. Plus, the more money you can keep coming in, the less you'll need to draw down from your retirement portfolios, and the more time you give that savings to grow.
But while you ought to stay invested while you can, you should start adjusting your portfolio for this next phase of life, if you haven't already done so. “The three to five years prior to retirement and three to five years in retirement are the most vulnerable time periods for your financial plan and investments,” says Taylor Schulte, San Diego-based Certified Financial Planner and host of the Stay Wealthy retirement podcast. “This is not the time to try and squeeze some extra return out of the stock market."
Goczalk had already been dialing down risk for years. His current portfolio is set to be 35 percent stocks and 62 percent bonds, with the rest in cash. Recent stock market movements have shifted his stock allocation down, but he's unfazed and simply plans to stay the course. “It is what it is,” Goczalk says. “The markets are the markets.”
He can afford to show less fear because the financial plan he and his wife, Anne, have set allows it. They can continue to live on the reduced income his leave package offers until he turns 65. For the next stage, he's invested a portion of his portfolio in certificates of deposit set to mature at different times over the next five years. This CD laddering strategy should let him maximize returns while keeping this soon-to-be spending money as safe as possible. “We feel very comfortable with the fact that we've secured our spending money,” Goczalk says. “It's not tied to any market gyrations."
Having his income streams set for the next several years also allows him to delay taking Social Security benefits until age 70. That means he'll qualify for delayed retirement credits, which increases his payout by 8 percent a year. Anne — a 59-year-old flight attendant, who retired from American Airlines three years ago — might also delay her own Social Security benefits. The earliest age retirement benefits can be claimed is 62, though the amount of the monthly payment from Social Security is reduced for people who claim early.
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Minimize your tax bill
But if you can afford it, waiting not only increases your retirement benefit, it also helps minimize your tax bill. “The biggest benefit of delaying Social Security until age 70 is to remain in a lower tax bracket during your gap years, [that] being the time between when you retire and when Social Security and [required minimum distributions] kick in,” Schulte says. “By staying in a lower tax bracket you are able to take advantage of some great tax planning opportunities, like annual Roth conversions."
That's exactly what Goczalk has planned. He's run the numbers and expects to stay in the 22 percent tax bracket until at least age 75. That allows him to move about $1 million from traditional IRAs to Roth IRAs over five years and save big on taxes in the long run. He'll have to pay any taxes that he'd deducted when he originally contributed that money to his traditional IRAs, but beyond that, he won't have to worry about taxes on withdrawals from Roth IRAs in the future, since the taxes have already been paid. Roth accounts also aren't subject to RMDs, which kick in for traditional IRAs when the owner hits age 72. “Roth conversions during your gap years are a great way to reduce your tax bill in retirement,” Schulte says.
Indeed, how and when you tap your retirement and investment accounts can make a significant difference in your taxes. To minimize the bill, experts typically recommend tapping your taxable accounts first, followed by your tax-deferred retirement accounts (such as 401(k)s and traditional IRAs), and saving Roth IRAs for last.
Think beyond money
Finally, remember that retiring is about more than money. You need to consider what the next stage of life will look like for you and how you'll fill your days once you're no longer working. So take the time to mentally prepare yourself. “It's not just about the finances and the benefits,” Francis says. “It's also about your mental state and how you can make sure that you're ready for this. Normally, people have years and years to prepare for this shift and now, people are having to make this shift in days."
Indeed, having sped up his retirement by three years and now having to do it amid a global pandemic, Goczalk is still hammering out the details. For now, he's content just not going to work. And since he approached his finances much the same way he approaches each flight — methodically — he's given himself the time to relax while he figures out what comes next.
"I tried to prepare as much as I could before the flight, but we got all kinds of curveballs thrown at us,” he says of his last trip in the captain's seat and his first in the 777, from New York City to São Paulo, Brazil, and back. “I was pretty keyed up. It was nerve-racking. But it was one of those things. You experience it. You get through it. It was an interesting flight to go out on."