Evaluating an early retirement offer: What to consider before accepting one

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When companies find themselves needing to cut costs, many choose to reduce payroll expenses by offering an early retirement package, also known as a voluntary separation or severance package. Companies typically offer these packages to senior management and/or employees who have been working for the organization the longest.

What does it mean if you are offered an early retirement package?

Faced with rising costs and perhaps lower revenues, companies may opt for this route rather than laying off long-term staff to maintain employee and customer goodwill.

Other reasons companies may offer early retirement packages include:

  • Elimination of redundant jobs post-merger
  • Elimination of positions that have been automated
  • Restructuring the workforce for strategic or operational efficiency reasons

While these offers are considered voluntary — meaning the employee does not have to accept the offer (perhaps thinking a better offer will come later), the offer should be carefully considered.

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 a typical early retirement package?

There are many variations of early retirement packages and what your company offers depends upon many factors including the financial health of your organization and historical precedence.

However, in general a package may include:

  • Cash payment: This amount is typically based on how long you’ve been with the company. You could be offered perhaps a week, two weeks or even a month of pay for every year of service. This payout is typically a lump sum, but it can be paid out over several years.
  • Payments for accrued vacation and/or sick time
  • Benefits such as company provided health and dental benefits for some period after separation through employer funded COBRA or similar means. The most lucrative packages would continue to provide medical coverage until age 65 — the age of Medicare eligibility.
  • In some instances, employers may provide an early retirement offer that includes a social security bridge payment. These are temporary payments that “bridge” you to what you would receive from social security at age 62.
  • Other perks such as life insurance, accelerated retirement or pension benefits, stock or stock options
  • A set amount of money to be used for continuing education or professional training purposes
  • Outplacement, coaching or other support to help you transition to another employer, consulting, or another career
  • Financial planning services

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 or non-disclosure agreement or even giving up some of your unvested retirement benefits.

Early retirement offers: When it makes sense to accept

Whether or not you accept the offer depends 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.

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

“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 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?
  • Will taking early retirement have a negative impact on your pension (traditional defined benefit plan)?
  • Do you have hobbies or other pursuits that you are passionate about if you retire early and no longer have work to keep you motivated and engaged?

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 and consult with a financial planner and/or tax professional, because you may be giving up more than you anticipated – financially and otherwise – 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 if your former employer does not provide this, then you will need a plan. Being prepared in advance for the unexpected in the workplace of today and tomorrow is a must.

These issues are just 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 if your goal is to travel after you retire, you will need to factor in those extra costs. This could be the time to consider downsizing or moving to an area with a lower cost of living to make your money go further.

Of course, even if you decide to take the early retirement offer, you may choose to keep working for another employer. 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.

“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.

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.

Can you negotiate an early retirement package?

If you decide you will be leaving the organization, there is not much risk associated with negotiating for a better package. Be your own advocate. Talk to others who have been through the experience, research the topic online or consult with an expert who has helped others in determining what is reasonable to request.

Also be prepared to provide the rationale for why you are asking for a better package or one that is better suited to your individual needs. If your employer cannot offer more money but they do offer health benefits which you can get from your spouse, then they may agree to pay you the value of the health insurance benefit in cash instead. Or instead of paying your salary in a lump sum, they may agree to pay it out over a longer period of time or vice versa to better personalize the offer to an employees’ individual financial situation.

As early retirement salary payments are taxable, be sure to inquire if your payout is gross or net of taxes. If you will have to pay taxes on the payout, you may be able to negotiate that the payout is grossed up for taxes meaning that your employer absorbs the tax payment on your behalf, and you net the value of the entire payout.

If your negotiation does not yield anything additional, at least you know you did not leave anything on the table.

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, 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 actually 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, 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. Many times, the first offer is the most generous, so waiting for a better offer may not be in your best interest.

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 to that point. Regardless of the offer, 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,” cautions Tyler.

Be sure to take your time and evaluate all of the options to make the best decision for you and your family.

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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.
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Senior wealth editor