You’ve been offered early retirement – now what?
If you’re 55 or older, be aware of how an early retirement offer could impact your finances.
Since the advent of COVID-19, more companies are considering early retirement packages to cut payroll costs or restructure their workforce. Typically targeted to older and more seasoned employees, early retirement packages can offer financial benefits that are worth considering. But there are several aspects to evaluate before deciding if an early retirement offer is the right choice.
1. Understand the benefits offered
Most early retirement offers will include severance pay, which is additional compensation for a period of time after the employee leaves their job. Severance pay can be structured as a continuation of salary for a period of time (say 6 months of on-going pay), or as a lump sum equivalent to a certain time period’s worth of pay.
Early retirement packages may also include on-going medical insurance or healthcare benefits; life and disability insurance coverage; enhanced pension benefits, such as being able to access your pension at an earlier age; career counseling or outsourcing resources.
It is important to understand exactly what you will receive in compensation and on-going benefits before making any decisions on your early retirement offer. You will want to consider the total amount of severance pay, and how this will impact your personal spending before you need to find other work or begin using your retirement savings.
You will want to understand how your medical and other insurance coverage is impacted, and if you actually need the additional benefits offered. For example, if you can obtain medical coverage under the health insurance of a spouse who is still working, you may not actually need the benefit provided by your employer.
If you have questions about the details of your early retirement offer, you should contact your employer’s HR department or attorney to have them explain all the details. It is worth considering consulting with an employment attorney or your financial advisor to help clarify details and help calculate how much the benefits will impact your financial situation.
2. Calculate the additional impacts
An early retirement offer can have additional financial implications beyond just the benefits you receive.
The end of your employment can reduce the amount of additional savings and employer contributions you receive in your workplace retirement accounts. You will want to review the terms for any deferred compensation, employee stock options or stock plans, pensions, and other financial benefits you have accrued. There could be impacts to how much of your pension you can access and when.
Deferred compensation plans and stock plans may have vesting or age requirements to be able to receive the maximum benefits of these plans. You will want to understand how accepting an early retirement offer could impact the financial value you ultimately receive from these additional resources. Will your decision have an impact on your ability to vest or sell stock awards or other incentives?
You may also need to look at the potential timing of annual bonuses, additional compensation opportunities and employer retirement contributions. Will the timing of when you might accept your offer impact your ability to receive additional financial incentives?
You’ll also want to assess the potential tax impact from accepting an early retirement package. Will you receive severance pay as ordinary income all at once or spread over more than one tax year? Could the additional payouts increase your tax bracket? Would accelerated payouts on pensions, deferred compensation or stock options have negative tax implications for you?
Work with your tax professional and financial advisor to assess all of the additional impacts before deciding on an early retirement offer.
3. What will you do next?
Once you have calculated the financial impact of an early retirement offer, it is very important to think clearly about what you plan to do next.
Have you already been considering retiring early and this offer may be the kickstart to the retirement you’ve dreamed of?
Are you thriving in your career and want to seek out the next challenge? Have you built a network ready to provide opportunities that suit your interests and expertise?
Do you have unique skills and ideas? Could you provide value as a consultant to your industry? Have you dreamed of owning your own business and now you have the freedom to do so?
Do you feel unsure about your financial situation, and you need to maintain full-time employment for your well-being?
All of these are important considerations to think through before deciding on your early retirement offer. Clear direction about where you are heading, and your financial needs to get there, is key to being able to make the right decision for your future.
It is also helpful to consider the condition of your employer. If there has been a recent acquisition or change in management direction, realize that your job could still be at risk, even if you do not accept the early retirement offer. You may find less generous terms to leave the company in the future.
4. Update your financial plan to make sure you’re still on track to retire
An early retirement offer is often a surprise and could create uncertainty for your future. If you had envisioned retiring several years in the future, ending your job now could mean less years to save and more years of spending that your retirement savings needs to support.
Even if you decide to keep working, it’s important to understand how accepting an early retirement offer will impact your long-term savings and spending plans. Work with a financial advisor to confirm the state of your current financial plan and run projections on how the change in your career status could impact your long-term security. You may need to adjust your savings plan and investment strategy to stay on track. If the impact is great enough, you may want to consider asking for a better offer from your employer to make up the difference.
5. Consider negotiating for better terms
Many employees do not realize that they may be able to negotiate early retirement offers, similar to how job offers are negotiated. Once you have a firm understanding of your future plans and the financial impact of the offer you’ve been presented, discuss making changes to the offer with your employer. You may be able to ask for more severance pay instead of health insurance if you have coverage through another source. Or you may be able to ask for different timing or terms of many of the financial benefits offered.
Your employer may or may not agree to your requests but having a dialogue and understanding that you can negotiate the offer may ultimately give you a better result.
Evaluating an early retirement offer from your employer can be a complex decision. Make sure you fully understand the benefits you will receive if you accept. Calculate the total financial impacts now and the effect the offer would have on your long-term financial plans.
Spend time thinking about what you want to do next, whether that is retiring early, finding another job, or starting your own business. Get advice from a financial advisor, tax professional and employment attorney to make sure you understand all the impacts of your decision. If warranted, consider engaging your employer to negotiate a better offer. Ultimately, you want to make an informed and educated decision on whether accepting an early retirement offer is right for you.
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About the Author:
David Edmisten, CFP®, is the Founder of Next Phase Financial Planning, LLC, a financial advisor in Prescott, AZ. Next Phase Financial Planning provides retirement, investment and tax planning that helps corporate employees retire with both financial and lifestyle security.