Should You Accept an Early Retirement Offer?
Many companies offer employees early retirement packages to encourage them to leave. This is generally done to encourage voluntary departures when the organization is looking to reduce headcount. Over the years, I’ve been asked by clients and friends whether they should accept such an offer from their company. Almost without exception, I’ve encouraged these folks to take the offer and not to look back. In my experience, once a person is on “the list,” their employer has decided they should go, and, whether now or down the road, this will generally occur.
Common Early Retirement Packages Features
Severance pay is often based upon years of service with the company. Sometimes an employer will add some additional years to sweeten the deal and make it more attractive. They may even add some years of service to get the employee to a higher payment level if there is a pension plan involved. Severance pay should also include all accrued vacation and any sick leave pay. (See also: The Layoff Payoff: A Severance Package.)
Retiree medical coverage, where available, is a benefit that covers employees until they are eligible for Medicare and may offer supplemental coverage past age 65. The number of companies offering this benefit is shrinking all the time as it is very costly.
Bridging refers to a retirement benefit that some companies may offer early retirees. This is an income supplement meant to bridge the gap between early retirement and eligibility for Social Security. The benefit amount is often equivalent to what the employee would receive from Social Security at age 62. (See also: 4 Unusual Ways to Boost Social Security Benefits.)
First Offer Usually the Best
Every situation is different, but the initial early retirement package offered by a company might include ”sweeteners” such as extended medical coverage, years of service added to a pension calculation and additional severance pay over and above what an employee would normally be entitled to. Additional incentives might include training and outplacement help. In many cases these early retirement packages and the incentives are geared to areas like the ability to receive early pension payments.
A number of years ago a friend called me to discuss an early retirement buyout offer he had received from his employer, a major local corporation. Given his age and the terms of the buyout offer, I strongly encouraged him to take the package. In the end, he declined the offer and stayed with the company. About a year later he was let go and the financial terms of his separation were not nearly as favorable as the initial early retirement package. Almost without exception, in my experience, the initial early retirement package offered by a company is the most lucrative one. (See also: The Layoff Payoff: A Severance Package.)
Refusing the Offer
Losing a job might not seem like a great opportunity, but a generous early retirement package might actually be a great opportunity for you. If you will continue to work and you are able to find a new job quickly the buyout could serve as a nice financial bonus. Turning down an early retirement offer may mean that you that you are “on the list” to eventually be let go and the terms at that point generally will not be as lucrative in the future. If you turn down the package you should have a "Plan B" in mind such as seeking another job or starting your own business, or you should have some reason to believe that you won’t be let go down the road.
What to Consider If You Accept
This situation might serve as a springboard to start your own business. If you were looking to retire in the near future anyway, this could be just the opportunity you were looking for. A client called me a few years ago absolutely giddy that his employer, a major corporation, was asking for volunteers to take a sweetened early retirement package. Between these incentives and the careful planning and investing he had done over the years, this turned out to be a fantastic opportunity to get a jump on his retirement. (See also: Seven Considerations When You Negotiate Severance.)
In analyzing whether to take an early retirement package you should at consider the following factors:
- What impact will this have on your overall financial plan and goals such as retirement and sending your kids to college?
- What might you do next? Retirement? Self-employment? Look for another job?
- If you will stay in the workforce what are your employment prospects?
- What are your health insurance options?
- How good are the incentives being offered? Can you or should you try to negotiate a better package?
- Are there consulting opportunities with your soon-to-be former employer?
The Role of a Financial Advisor
If you are presented with an early retirement package you would be wise to consult with a knowledgeable financial advisor. He or she can advise you as to the financial ramifications of the package. This might include the impact on your ability to retire. While the package may include some or all of the incentives discussed above, an advisor can help you assess your overall readiness for retirement. Have you saved enough in your 401(k) or other retirement plan? What other retirement resources can you rely upon? A pension? A spouse’s retirement plan? Other tax-deferred and taxable resources? (See also: 6 Tips to Stop Worrying About Retirement.)
A financial advisor can put together a financial plan including retirement projections based on a variety of scenarios and assumptions that factor in the impact of any incentives. Planning is important because, all things being equal, an early retirement puts added stress on your retirement resources.
The tax impact of the offer must also be considered. Depending upon your age, withdrawals from your retirement plan may be subject to a 10% penalty on top of regular income taxes if you are under 59½. There are potential exceptions to this for 401(k) plans and an advisor can help determine if this applies to your situation. (See also: How to Minimize Taxes on Severance Pay.)
The Bottom Line
Early retirement packages have long been offered to groups of employees at companies to provide an incentive for them to leave the company as they seek to reduce their headcount. If you are offered a package you should strongly consider it and should engage the services of a financial advisor to help you evaluate the terms of the package and the impact on your retirement. (See also: Laid Off? You Can Still Retire.)