Your Finance: Triage on premature retirees' plans

A recruiter waits to meet with job seekers A recruiter waits to meet with job seekers at a career fair on June 24, 2013, in King of Prussia, Pa. Claims for unemployment insurance are down in a U.S. Labor Department report on April 10, 2014. Photo Credit: AP / Matt Slocum

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For many older workers, the recession never ended; long-term joblessness has morphed into de facto premature retirement.

Now, millions are performing financial triage on retirement plans that had been based on assumptions of working longer.

Nothing hits a retirement plan harder than job loss in the last years of work. These are the years of peak earnings and -- one hopes -- peak contributions to retirement accounts.

Repairing a retirement plan is difficult for premature retirees, but there are ways to mitigate the damage:

Create a detailed spending projection. Retirement spending forecasts often assume that 80 percent of pre-retirement income needs to be replaced. Yet, research by Morningstar shows that needed replacement rates vary from under 54 percent to over 87 percent -- and that spending declines over time, especially as people reach advanced ages when they have less interest in and ability to spend on travel, entertainment and clothes.

Be strategic about meeting short-term income needs. You'll want to minimize early withdrawal penalties and taxes, so if you have a liquid emergency fund, that's the first place to go. Taxable accounts are a good second choice, since there are no early withdrawal penalties, and stocks you've held for more than a year are taxed at the low long-term capital gain tax of 15 percent.

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A Roth IRA drawdown is less desirable. And tapping a traditional IRA or 401(k) would come next. Withdrawals are taxed as ordinary income, and you may owe a 10 percent early-withdrawal penalty if you are under 59 1/2. However, if you are at least 55 and retire, quit or get fired, you can make penalty-free withdrawals from the 401(k) plan of your last employer under section 72(t) of the IRS code. This is done by moving the funds to a rollover IRA, and taking distributions on a schedule of equal distributions over time. Consult a tax expert; 72(t) distributions done incorrectly can generate sizable penalties.

Avoid taking Social Security early if possible. Most retirees can generate greater lifetime income from Social Security by waiting at least to age 66.

Manage health insurance expenses carefully. Retirees 65 or older are covered by Medicare. Younger retirees may be able to get coverage through a working spouse's insurance, or they can buy a policy through the Affordable Care Act (ACA) insurance exchanges. Although open enrollment for this year has ended, you can qualify for a special enrollment for 60 days following loss of health coverage from a former employer.

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