In today’s corporate environment, cost-cutting, restructuring, and downsizing are the norm, and many employers offer their employees early retirement packages. It can be challenging to know if a seemingly attractive offer you’ve received is a good one.
Additionally, it can be challenging to understand what your options for negotiating an early retirement are. Ensure that your early retirement package meets your needs by understanding the many ways early retirement can affect you.
What’s the severance package?
Most early retirement offers include a severance package based on your annual salary and years of service for the company. For example, your employer might offer you anywhere from one week to a month’s salary for each service year. Whether you’re planning to get a new job or fully retire, 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. You may also be able to take deferred payments over several years to spread out the income tax you pay on your severance package.
How does this affect your pension?
If your employer has a traditional pension plan, the retirement benefits you receive are based on your age, years of service to the company, and annual salary. You must typically work until your company’s average retirement age to receive the maximum benefits. The full retirement age generally is 65.
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 considerable because pension benefits typically accrue faster as you near retirement. However, your employer may provide you with more considerable pension benefits until you can start collecting Social Security at age 62.
Alternatively, 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 or use to negotiate, 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 care options, such as COBRA, a private policy, or dependent coverage through your spouse’s employer-sponsored plan. Your healthcare costs will probably increase as you age, so an offer with no medical coverage may not be worth taking if the other options are unavailable or too expensive.
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 are the other available benefits?
Some early retirement offers include employer-sponsored life insurance. This can help you meet your life insurance needs, and the coverage will likely be at low or no cost to you. However, continued employer coverage is usually limited. For example, you may be offered one year’s coverage equal to your annual salary. In other scenarios, you will not be offered any life insurance coverage.
Not receiving life insurance 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’s coverage to a separate policy, though your premium will be higher than when you were employed.
Also, a fair early retirement offer may include other perks. Your employer may provide you with financial planning assistance. This can come in handy if you feel overwhelmed by all the financial questions 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 and how much room you have to negotiate your early retirement package.
Can you afford to retire early?
To decide if you should accept an early retirement offer, you can’t just look at the proposal itself. It would help if you considered your full financial picture. Can you afford to retire early? Even if you can, will you still be able to reach all your retirement goals? These are tough questions that a financial professional should help you sort out, but you can take some necessary steps yourself.
Identify your sources of retirement income and the yearly amount you can expect from each source. Then, estimate your annual retirement expenses, and be sure to include taxes and inflation. The next step is to make sure your income will be more than enough to cover your costs. 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 if 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.
If you 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. Finding a new job doesn’t mean that you must abandon your former work line for a new career. You can start by talking to your former employer about hiring you as a consultant. You may also find that you would like to turn what was once just a hobby into a second career. Finally, 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 burdensome. If you have been out of the job market for a long time, you might not feel comfortable marketing yourself for a new job. Some companies provide career counseling to assist employees in re-entering the workforce. Suppose your company does not provide you with this service. In that case, you may want to investigate corporate outplacement firms and nonprofit organizations in your area that work with people in a career transition.
Many early retirement offers contain non-compete 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, especially if you negotiate. However, plenty of people are not so lucky. Consider whether your position could be eliminated down the road and if early retirement is the best option for you.
If the consequences of saying no are hard to predict, use your best judgment, and seek professional advice. Be aware that you shouldn’t take too long to decide what you’ll do. You may have only a short window, typically 60 to 90 days, to make your decision.
The bottom line
Early retirement can be a blessing to some but feel burdensome for others. Remember that your company is likely offering you early retirement for a reason and that you might have room to negotiate your early retirement package. You might be able to retire fully or take an early retirement package and re-enter the workforce. Regardless of what you choose to do, it is helpful to have someone in your corner.
Be sure to ask your financial advisor about your options and the most advantageous early retirement package for your financial goals. A seasoned advisor will have worked with other people as they decide when and how to enter retirement and will be able to help you make the best decision for you and your family.