In today’s corporate environment, cost cutting, restructuring, and downsizing are the
norm, and many employers are offering their employees early retirement packages. But
how do you know if the seemingly attractive offer you’ve received is a good one? By evaluating it carefully to make sure that the offer fits your needs.
What’s the severance package?
Most early retirement offers include a severance package that is based on your annual
salary and years of service at the company. For example, your employer might offer you
one or two weeks’ salary (or even a month’s salary) for each year of service. Make sure
that the severance package will be enough for you to make the transition to the next
phase of your life. Also, make sure that you understand the payout options available to
you. You may be able to take a lump-sum severance payment and then invest the
money to provide income, or use it to meet large expenses. Or, you may be able to take
deferred payments over several years to spread out your income tax bill on the money.
How does all of this affect your pension?
If your employer has a traditional pension plan, the retirement benefits you receive from
the plan are based on your age, years of service, and annual salary. You typically must
work until your company’s normal retirement age (usually 65) to receive the maximum
benefits. This means that you may receive smaller benefits if you accept an offer to
retire early. The difference between this reduced pension and a full pension could be
large, because pension benefits typically accrue faster as you near retirement.
However, your employer may provide you with larger pension benefits until you can start
collecting Social Security at age 62. Or, your employer might boost your pension
benefits by adding years to your age, length of service, or both. These types of pension
sweeteners are key features to look for in your employer’s offer — especially if a
reduced pension won’t give you enough income.
Does the offer include health insurance?
Does your employer’s early retirement offer include medical coverage for you and your
family? If not, look at your other health insurance options, such as COBRA, a private
policy, dependent coverage through your spouse’s employer-sponsored plan, or an
individual health insurance policy through either a state-based or federal health
insurance Exchange Marketplace. Because your health-care costs will probably
increase as you age, an offer with no medical coverage may not be worth taking if these other options are unavailable or too expensive. Even if the offer does include medical
coverage, make sure that you understand and evaluate the coverage. Will you be
covered for life, or at least until you’re eligible for Medicare? Is the coverage adequate
and affordable (some employers may cut benefits or raise premiums for early retirees)?
If your employer’s coverage doesn’t meet your health insurance needs, you may be able
to fill the gaps with other insurance.
What other benefits are available?
Some early retirement offers include employer-sponsored life insurance. This can help
you meet your life insurance needs, and the coverage probably won’t cost you much (if
anything). However, continued employer coverage is usually limited (e.g., one year’s
coverage equal to your annual salary) or may not be offered at all. This may not be a
problem if you already have enough life insurance elsewhere, or if you’re financially
secure and don’t need life insurance. Otherwise, weigh your needs against the cost of
buying an individual policy. You may also be able to convert some of your old employer
coverage to an individual policy, though your premium will be higher than when you
were employed.
In addition, a good early retirement offer may include other perks. Your employer may
provide you and other early retirees with financial planning assistance. This can come in
handy if you feel overwhelmed by all of the financial issues that early retirement brings.
Your employer may also offer job placement assistance to help you find other
employment. If you have company stock options, your employer may give you more
time to exercise them. Other benefits, such as educational assistance, may also be
available. Check with your employer to find out exactly what its offer includes.
Can you afford to retire early?
To decide if you should accept an early retirement offer, you can’t just look at the offer
itself. You have to consider your total financial picture. Can you afford to retire early?
Even if you can, will you still be able to reach all of your retirement goals? These are
tough questions that a financial professional should help you sort out, but you can take
some basic steps yourself.
Identify your sources of retirement income and the yearly amount you can expect from
each source. Then, estimate your annual retirement expenses (don’t forget taxes and
inflation) and make sure your income will be more than enough to meet them. You may
find that you can accept your employer’s offer and probably still have the retirement lifestyle you want. But remember, these are only estimates. Build in a comfortable cushion in case your expenses increase, your income drops, or you live longer than expected.
If you don’t think you can afford early retirement, it may be better not to accept your
employer’s offer. The longer you stay in the workforce, the shorter your retirement will
be and the less money you’ll need to fund it. Working longer may also allow you to build
larger savings in your IRAs, retirement plans, and investments. However, if you really
want to retire early, making some smart choices may help you overcome the obstacles.
Try to lower or eliminate some of your retirement expenses. Consider a more
aggressive approach to investing. Take a part-time job for extra income. Finally, think
about electing early Social Security benefits at age 62, but remember that your monthly
benefit will be smaller if you do this.
What if you can’t afford to retire? Finding a new job
You may find yourself having to accept an early retirement offer, even though you can’t
afford to retire. One way to make up for the difference between what you receive from
your early retirement package and your old paycheck is to find a new job, but that
doesn’t mean that you have to abandon your former line of work for a new career. You
can start by finding out if your former employer would hire you as a consultant. Or, you
may find that you would like to turn what was once just a hobby into a second career.
Then there is always the possibility of finding full-time or part-time employment with a
new company.
However, for the employee who has 20 years of service with the same company, the
prospect of job hunting may be terrifying. If you have been out of the job market for a
long time, you might not feel comfortable or have experience marketing yourself for a
new job. Some companies provide career counseling to assist employees in re-entering
the workforce. If your company does not provide you with this service, you may want to
look into corporate outplacement firms and nonprofit organizations in your area that deal
with career transition.
Note: Many early retirement offers contain non-competition agreements or offer
monetary inducements on the condition that you agree not to work for a competitor.
However, you’ll generally be able to work for a new employer and still receive your
pension and other retirement plan benefits.
What will happen if you say no?
If you refuse early retirement, you may continue to thrive with your employer. You could
earn promotions and salary raises that boost your pension. You could receive a second
early retirement offer that’s better than the first one. But, you may not be so lucky.
Consider whether your position could be eliminated down the road.
If the consequences of saying no are hard to predict, use your best judgment and seek
professional advice. But don’t take too long. You may have only a short window of time,
typically 60 to 90 days, to make your decision.
Securities offered through IFP Securities, LLC, dba Independent Financial Partners (IFP), member FINRA/SIPC. Investment advice offered through IFP Advisors, LLC, dba Independent Financial Partners (IFP), a Registered Investment Adviser. IFP and Hitchcock Maddox Financial Partners are
not affiliated. This is for educational and information purposes only and is not research or a recommendation regarding any security or investment strategy.
Evaluating an Early Retirement Offer
