Should You Take Early Retirement? How to Decide
Do you have a date for retirement set in your mind? Most people plan for years in anticipation of their last day of work. But what if your boss unexpectedly offered you a buyout to retire earlier than you planned?
At first glance, the thought of getting a lump sum not to go to work may seem appealing. But as Angela DiCastri, director of retirement markets at Northwestern Mutual suggests, “Before you accept an early retirement package, you first should carefully consider how retiring early may impact your finances now and in the future.”
DiCastri suggests you start by taking a hard look at your company and its financial strength. “Many employers offer early retirement packages as a first step toward reducing headcount and cutting compensation costs; often, the next step is job cuts. If you think your company is headed in that direction, an early retirement package may be the best deal you’re going to get. However, if your company is relatively stable and your job isn’t in jeopardy, having extra time to save for retirement can be an advantage.”
Assuming you’re inclined to take the offer to retire early, take a close look at the details of your package. At a minimum, DiCastri suggests that you consider the following:
1. How is the package structured? Most employers provide some amount of severance, which is money and benefits paid to an employee when that person leaves a company. “Make sure you understand what you’re getting and whether you have payout options,” says DiCastri. “Taking your severance as a lump sum can give you maximum flexibility to use or invest that money any way you choose, but it can also increase your taxable income in the year you receive the money. In contrast, taking your severance in a series of payments may not give you as much flexibility; however, the certainty of receiving regular payments can make budgeting easier and allow you to spread out your tax bill over time.”
2. Does the offer include health insurance? Your package may include the ability to continue your employer-sponsored health insurance for a period of time. “If it doesn’t, you’ll need to explore getting health insurance at least until you reach age 65 and Medicare begins,” says DiCastri. “Be prepared for it to be expensive: Depending on the type of coverage you select, your premiums alone could eat up all or a significant chunk of the severance you’ll receive.”
3. How will early retirement impact your pension? If you have a pension plan at work, retiring early may significantly reduce the benefits you’re entitled to receive. To boost your benefits, see if your employer will bridge you to normal retirement age by giving you extra credit for years of service. “Also, if you have a choice of taking your pension benefits as a lump sum or annuity, be sure to do a thorough analysis before you decide. In many cases, the annuity turns out to be the better choice,” says DiCastri.
4. Will you be eligible for unemployment? Generally, if you quit your job voluntarily, you won’t be eligible for unemployment benefits. On the other hand, if you’re willing to work but your employer lays you off for economic reasons, you should qualify for unemployment. Be sure you understand clearly how your decision to accept early retirement will impact your ability to claim benefits.
5. Can you postpone the offer? One way to sweeten your early retirement offer is to ask if it can take effect at a later date. “Working an additional six months or a year will give you more time to figure out your finances and a chance to sock away as much as possible for retirement,” says DiCastri. “It will also boost any pension benefits you may have and give you time to find another job if you want or need to keep working.”
While most people don’t like the idea of losing their job, a generous buyout might be a great opportunity for you to transition to a new phase of your life. Still, it can be difficult to know whether retiring early is the right decision. That’s why DiCastri believes a financial professional can make a difference.
“A financial professional can help you evaluate an early retirement package; discuss your options, including how you can use Social Security rules to get the highest benefit possible; and stress-test your plan to ensure your savings will last as long as you need them to.”
As companies continue to look for ways to boost profits and sharpen their competitive edge, early retirement packages are here to stay. For this reason, it makes sense to consider what you might do if this situation were to present itself. That way you’ll have a head start when it comes to deciding whether early retirement is the right move for you.