Should you accept an early retirement offer?

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In tough economic times, many companies look to lay off their long-time employees, especially those who are making quite a bit of money. So they may offer these employees an early retirement package, giving them some extra incentive to choose to leave the company.

But if you’re presented with one of these offers, should you accept it? Here are some of the key things you need to know to make the best choice possible for yourself.

What is an early retirement offer?

As it’s looking to reduce costs or downsize, your company may offer you an early retirement package. In exchange for leaving the company, you may receive a compensation package, which could range from generous all the way down to “don’t let the door hit you on the way out.”

With such packages you might receive salary, perhaps a week or month for every year you’ve been at the company. So you might receive six months of salary up to perhaps two years’ worth. You may also receive health and dental benefits for some period of time, and you may receive other perks, such as accelerated benefits on retirement, stock or options packages.

The package can vary substantially from employer to employer and depends on many factors. Your offer may also be contingent on other concessions, including signing a non-compete agreement or even giving up some of your already-existing but unvested retirement benefits.

“Make sure you understand the offering and ask if any of it is negotiable,” says Lorraine Ell, senior financial adviser and CEO at Better Money Decisions in Albuquerque, New Mexico.

Early retirement offers: When it makes sense to accept

So you’ve received an early-retirement offer – should you take it? That’s going to depend on a lot of issues, not only your own personal financial situation but also your company’s.

Your company’s motivations

“Early retirement may not fit in with your plans but let’s face it, your employer has decided that they need you to leave,” says Ell. “Staying can put you at jeopardy for getting laid off without compensation or worse, fired.”

“Why is your company doing this,” asks Paul Tyler, CMO of Nassau Financial Group in Hartford, Connecticut. “If you need to work, think carefully about what this action suggests about the future of the company or market. If COVID-19 created just a temporary decline in revenues, the offer may speak to immediate cash flow needs versus the overall health of the business.”

However if your company is going through more serious or longer-term issues, the situation may not improve. So it could make sense to take an offer while you have one.

Your financial situation

While you may end up taking an offer because you’re making the best of a bad situation, you’ll want to consider a number of issues that may arise if you’re not employed. But while you’re taking early retirement from this company, that doesn’t mean you have to retire. You’ll also want to consider how accepting the offer affects your retirement finances such as Social Security.

The first scenario is the one that most of us would prefer to be in.

“Do you need to work to pay your bills,” says Tyler. “You may be lucky enough to have earned and saved enough to be financially independent. If you fall into this rare category, congratulations.”

If working is a lifestyle decision, you’re in an enviable position, but whether working is a choice or not, you’ll still need to assess your financial picture, especially if you’re on the younger side.

“The younger you are, the more stress will be placed on retirement assets,” says Chuck Czajka, founder and CEO of Macro Money Concepts in Stuart, Florida.

If the offer is generous and you think you’re able to retire, experts recommend that you review your finances thoroughly before making that decision. You’ll want to ask yourself:

  • Do you have enough to live comfortably in retirement?
  • Are you old enough to access retirement accounts such as a 401(k) or IRA penalty-free?
  • Do you have access to healthcare and will you be able to afford it?
  • What other sources of retirement income do you have available?

If you retire early, you might be able to get by for a few years until you can access your full retirement funds at age 59 1/2. However, you’ll also want to consider how early retirement affects Social Security, a decision that will impact your monthly benefits for the rest of your life:

  • Calculate your benefits to see how much retiring now will affect your payout later.
  • Have you already worked enough to claim a sufficient benefit?
  • Will you be able to pull through financially until Social Security kicks in?
  • Will you opt for an early benefit rather than your full retirement benefit?

While early retirement sounds attractive, you’ll want to keep these questions in mind, because you may be giving up more than you anticipated when you first decided to retire.

How Social Security is affected

“If you retire before you get to retirement age, your benefits might be less when you get to Social Security retirement age,” says Czajka. “Planning to maximize your benefits could be a very important part of your retirement income.”

“You may be factoring in Social Security to fund part of your retirement, but to receive your full Social Security, you will need to wait until your full retirement age, which may be years away if you are planning to retire early,” says Bill Van Sant, senior vice president and managing director at Girard, a wealth management firm in the Philadelphia area. He stresses the importance of knowing where your sources of income will be before taking any offer.

“You may need ‘bridge’ income to support your standard of living between when you retire and when other income sources may be available to you,” says Van Sant.

And those issues are largely on the income side. You’ll also need to think carefully about your costs, especially if you’re on a fixed income. Healthcare costs climb significantly in later years, and you may want to use your free time on more costly pursuits such as travel.

Of course, even if you decide to take the early retirement offer, you may not have to stop working. And that may offer an extra benefit, if you’re already behind in saving for retirement, you can turn around and find another job and “double dip” on your income to pad your savings.

And if you get any accelerated retirement benefits, you could be even better off taking a package. But it’s imperative that you understand any contract that you sign, especially if you plan on continuing to work after you leave your current employer.

Ell describes one client in his 60s whose company was hit by the effects of COVID-19 and decided to keep a younger employee, but offered him a year of salary and healthcare.

“Sure it was a blow to his ego, but after analyzing his financial situation, we discovered that the deal was close enough to what he would have if he had been able to work two more years and he is enjoying retirement,” she says.

What if you don’t want to take early retirement?

If you forgo the offer, don’t be surprised if you receive an involuntary severance later on, especially if your employer is in a difficult position. In that situation, you’ll want to carefully assess any severance package or outplacement services offered to you.

But you still may be able to salvage a job, especially if you recognize that job cuts may be occurring before they finally do.

Rather than take an early retirement package, “ask if there are any other departments in the company that may be a good fit to transition to,” says Faron Daugs, founder and CEO of Harrison Wallace Financial Group in the Chicago area.

Daugs suggests even offering to reduce hours or transfer health insurance to a spouse’s company, if possible, in order to preserve your job. Another option would be inquiring whether the company would hire you back as a consultant if you do accept the retirement package.

However, if you accept the offer or are forced into retirement, it could be a good time to make a late-stage pivot into a new area.

“People in this situation may think about taking a career change, opening a business or taking a part-time job and using retirement income to make up the difference in income needs,” says Czajka. “Another option would be to start a business, maybe one that could be developed out of a hobby you enjoy doing.”

In the end, however, you may have no choice but to leave the company. When you’re presented with an early retirement offer, carefully consider what the best course of action is likely to be. This way you can play offense and make the decision that’s best for you when you have the chance.

Bottom line

An early retirement plan could be a blessing or a curse, depending on the quality of the offer and how you’ve planned your finances up until then. Regardless of the offer, however, it’s key to carefully read it and understand what you need to do to hold up your end of the bargain.

“Make sure you understand all the fine print before evaluating the option,” says Tyler.

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Written by
James Royal
Senior investing and wealth management reporter
Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.
Edited by
Senior wealth editor