Financial Intel Monthly

Evaluating an Early Retirement Offer

May 15, 2019 9:15:44 AM / by The Retirement Group (800) 900-5867

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.

 

 

Tags: The Retirement Group

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