Hearing that your place of employment is offering an early retirement package may be music to your ears. But should you take it? Here are some questions to ask before you make your decision.
What Is an Early Retirement Package?
Early retirement packages are voluntary benefit packages that include severance and typically some additional perks. Most often these are offered to employees nearing retirement age when the organization needs to reduce costs or eliminate positions.
How Do Early Retirement Packages Work?
Each early retirement package is unique, so exactly what is included depends on the organization or company you work for. Many times there are payouts and additional benefits to cover the time between the early retirement package and the time when the employee would typically retire. Addressing some of the most common concerns people have (such as: “how will I get healthcare coverage?”) can encourage eligible employees to take the early retirement option.
The Payout
There are a few different ways a payout can occur. A lump sum payment, which is typically based on how long you’ve been with the company, may be offered. You may also get paid out for PTO days or unused sick days. Continuing salary, in which the employee receives salary payments until retirement age, may be offered in lieu of a lump sum payout. Bridge payments may be offered to close the gap between retirement and eligibility for Social Security benefits at 62.
Extended Benefits
Healthcare coverage may be a part of your retirement package, as employers know that having health insurance is a significant concern for retirees. Because of the rising cost of healthcare, few early retirement packages cover healthcare until Medicare eligibility, though many do offer some healthcare coverages support.
Another benefit that may be a part of the package is life insurance or disability insurance.
Additional Benefits
Some early retirement packages offer additional benefits tailored to this stage of life, either outplacement services to help you transition to another employer or career, or financial planning services to assist as you transition to part-time work or retirement. You may also want to inquire about retaining company property, such as a laptop, extending your use of company car or continuing to utilize a gym membership subsidy.
What to Consider When Evaluating an Early Retirement Offer
Before you accept an early retirement, take a look at the severance package to determine if it is a good fit for you now and into the future.
Total Value of the Buyout
Consider how the total value of the package compares to your needs. Take into account your salary, healthcare needs, retirement savings, Social Security benefits and tax liability.
Health Coverage
Does the retirement package include medical coverage? If so, how long will you be covered? What about vision and dental? Will anything change from your current health insurance?
You aren’t eligible for Medicare until age 65, so ensuring you can meet your healthcare needs is an important part of planning for retirement. Without coverage, you may need to find another job or to purchase a plan on the Health Insurance Marketplace, which could be costlier than your employer-sponsored plan. Consider that as you age, your healthcare needs will typically increase; your coverage becomes even more important.
Your Retirement Savings
Taking an early retirement not only cuts off time that you would be contributing to your retirement accounts, but also may require you to start accessing those accounts earlier. That increases the risk of outliving your retirement savings. If your workplace offers a pension, be sure you understand how that will be impacted by taking an early retirement.
Impact on Social Security Benefits
You are eligible to begin taking Social Security benefits at age 62, though full retirement age is approximately 67. Social Security benefits are calculated using the 35-highest earning years of employment. If you stop working before you have reached 35 years in the workforce, your benefits will be reduced.
Additionally, with each year you delay taking Social Security, the monthly benefit increases (up to age 70). Waiting to collect Social Security may be a key strategy in ensuring you have enough income in retirement; consider how retiring early may influence when you begin collecting Social Security payments.
Your Tax Liability
Receiving a lump sum payment from an early retirement package may impact your tax liability, as your income greatly increases that year. Another tax implication to consider is if you need to access your 401(k) or IRA funds early in retirement. Typically, if you are below age 59½ , you may have to pay penalties when you withdraw early. However, if you take an early retirement package, you may be eligible to withdraw funds without a penalty at 55, though you may have to pay income taxes on withdrawals.
Can You Negotiate or Decline an Early Retirement Offer?
In some cases, you may be able to negotiate an early retirement package to make it what you want. Consider if some things could be dropped in favor of something else. For example, if you can get healthcare coverage through a spouse’s plan, perhaps you can give up any healthcare coverage support in favor of something else that aligns with your retirement plan.
You are always welcome to decline an early retirement offer, but you should consider the reasons for the offer (such as eliminating payroll) and weigh that against your security in your role. You may also want to think about how often these offers arise and compare that to your desired timeline.
Who Can Help?
Work with a financial advisor to determine if an early retirement package will work with your retirement plans or to discuss alternative option