How to Evaluate an Early-Retirement Offer

In today’s environment of corporate cost-cutting and restructuring, many employers are offering early-retirement packages. But how do you know if the offer 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 based on your annual salary and years of service at the company. For example, your employer might offer you 4 weeks’ salary for each year of service. The first thing is to make sure that the severance package would be enough for you to make the transition to retirement. Also, make sure that you fully understand the payout options available. 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 smooth out your income taxes.

How does 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 work until your company’s 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 these benefits typically accrue faster as you near retirement. However, your employer might be giving larger pension benefits until you collect Social Security. 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, coverage through your spouse’s plan, or an individual health insurance policy through either a state-based or federal health 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 were 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 just until you’re eligible for Medicare? Is the coverage adequate (some employers may cut benefits or raise premiums for early retirees) and affordable? If employer coverage doesn’t meet your health insurance needs, you may be able to fill the gaps with other insurance.

What are the other benefits?

Some early-retirement offers include life insurance. This can help you meet your needs, and the coverage probably won’t cost much (if anything). However, continued employer coverage can be limited (e.g., one year’s coverage equal to your annual salary) or may not be offered at all. If you already have enough life insurance elsewhere, or if you don’t need life insurance at all, then it’s not a problem. Otherwise, weigh your needs against the cost and possibility of buying another policy. You may be able to convert some of your old employer coverage to an individual policy, though your premium likely will be considerably higher than when you were employed.

A good early-retirement offer may include other perks. Your employer may provide you with financial planners. We are big believers in planning, so you can avoid being overwhelmed by the myriad financial choices that early retirement brings. Your employer may also offer job placement assistance, which can be very helpful if you want to find another job. 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 to find out exactly what your 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, which a CFP can 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, inflation, and medical care) and make sure your income will meet them. You may find that you can accept your employer’s offer and still have the retirement lifestyle you want. But remember, these are only estimates. Build in a comfortable cushion in case your expenses increase, or if 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 now may help you overcome the obstacles later. Try to lower or eliminate some of your retirement expenses. Take a part-time job for extra income. Finally, think about whether to take Social Security benefits early, but your monthly benefit would be smaller if you were to do this.

What if you can’t afford to retire?

You may find yourself forced to accept an early retirement offer, even though you can’t afford to retire. One way to make up the difference is to find a new job, but that doesn’t mean that you have to abandon your former line of work. Perhaps your employer would hire you back as a consultant. Or you may find that you can turn what was once a hobby into a second career. There also might be the possibility of finding full-time or part-time employment with a new company.

However, for those who have worked at the same company for decades, the prospect of job hunting can be terrifying. 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. If your company does not provide this service, you may want to look into corporate outplacement firms and nonprofit organizations in your area that deal with career transition.

What happens if you say no?

If you refuse early retirement, there’s a chance 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. When the consequences of saying no are hard to predict, use your best judgment and seek professional advice. Keep in mind that you may have only a short window of time, typically 60 to 90 days, to make a decision.

Blue Spark Capital Advisors

We're a boutique fee-only Registered Investment Advisory (RIA) and financial planning firm based in New York City and the Berkshires.

We provide planning and investment management services and financial coaching to women, men and their families.

We believe in a holistic approach. Movement in each piece of your financial plan impacts the others, so we consider your entire picture.

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