Should You Accept an Early Retirement Offer?
Your boss just sat you down and handed you an early retirement offer. You’re initially excited at the generous retirement package they’re offering, and you immediately start envisioning a lavish celebratory vacation.
Or maybe you’re offended at your boss’s eagerness to usher you out the door, and though you don’t want to leave, you’re worried they’ll just let you go if you don’t accept the retirement offer.
Is accepting an early retirement offer a good idea? Let’s take a closer look at what early retirement packages usually involve and then go over a few consequences of taking early retirement that you should keep in mind when making your decision.
Why Do Companies Offer Early Retirement, and What’s Included?
Companies often try to incentivize early retirement for employees if they’re trying to downsize or reorganize staff. They might offer a personalized early retirement package to an individual or make a buyout offer to a group of employees (like a department or all employees who have reached a certain tenure).
The first offer is usually the most generous one, so if you’re tempted to hold out for a better offer, you’re likely to be disappointed.
Early retirement packages often include severance payments, which usually constitute two weeks of severance for each year you worked at the company (or more if you were a senior manager or executive). Some offers may include salary continuation, or uninterrupted salary payments until you reach retirement age.
Some early retirement offers include supplemental income called bridging, which bridges your income gap until you’re eligible for Social Security income. In some rare cases, offers might consist of some form of supplemental health insurance coverage until you reach the eligibility age for Medicare.
What Happens When You Take Early Retirement?
While it could be tempting to take the cash and run, you should consider all the implications of retiring sooner than you’d planned.
1. Your Monthly Retirement Income Might Be Lower
If you start receiving distributions earlier than a specified age, the provisions in some plans decrease your pension benefits. And some companies levy penalties for early withdrawals, averaging 5% to 7% of your pension for each early retirement year.
Usually, employer-sponsored retirement plans such as IRAs and 401(k)s are also subject to a 10% early distribution tax if the recipient is younger than 59½ years old.
Also, retirement benefit plans are usually calculated based on your years of service and your highest salary while you worked at the company. Retiring early shortens the period you were at the company, and you risk giving up a higher earning period right before standard retirement age.
2. Your Retirement Assets Will Have to Last Longer
Keep in mind that life expectancies in the U.S. are rising. You may be counting on your retirement savings into your 80s and 90s, so it’s usually wise not to tap into those assets until you have to.
3. You’ll Have Less Time to Save for Retirement
In the same vein, every year counts when saving for retirement. If you retire several years early, you might be missing out on thousands of dollars’ worth in earned interest. Whatever buyout offer your company gives should be measured against the opportunity cost of your potential retirement savings during your last few years of work.
4. You Might Suffer Psychologically from Early Retirement
Are you personally ready to retire? It might be hard for you to go from full-time employment to a slower lifestyle—especially if you haven’t been mentally preparing yourself for the change.
5. Other Retirement Benefits Will be Skewed
Social Security and Medicare retirement ages won’t change just because you retire early. You won’t be eligible for Medicare until the age of 65, and even though you can apply to receive early Social Security benefits starting as early as age 62, you will receive less than had you waited until your full retirement age.
Should You Accept Early Retirement?
In the end, whether you should accept an offer of early retirement depends on your personal situation and the benefits offered in the retirement package. Try negotiating for the best terms possible, keeping all the risks of retiring early in mind.
You can also consult your financial or investment advisor—one who isn’t employed by your company to avoid conflicts of interest—to come up with a financial plan that takes into account your needs as you head into your retirement.
Our Greenwood Village, CO financial planning firm provides fiduciary retirement planning to avoid such conflicts of interest. We recommend that you seek out a fiduciary advisor so that you know the advice you receive is in your best interests.
Discuss your situation with a fee-only financial advisor. Schedule a complimentary discovery call.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
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