What would you do if you were to receive an early retirement offer? It’s worth thinking about even if you don’t expect to receive one next week. As we’ve all learned over the past couple of years, anything is possible in the working world. And it’s always best to be prepared.
With that in mind, here are 12 things to consider when offered an early retirement package:
1. Why Is Your Employer Offering Early Retirement Incentives?
Before you give serious consideration to whether to take the offer and how you might adapt to a new financial reality, think about the context of the offer. Why is your company offering you incentives to retire? The answer to that question might affect how you respond.
The reason an offer is in the table will be specific to the offer: markets or jobs could be changing, the company may want to hire new employees, the economy could be causing cash flow issues. Feel free to ask why your employer is offering the deal, and why they are offering it specifically to you.
For example, if your company is in a bad financial state, it might be wise to accept the offer. Otherwise, you might face a less attractive scenario, such as a layoff, in a few months. That might sound alarmist but arm yourself with facts before you go further.
On the other hand, your employer might simply be seeking to trim costs and, as is often the case, employees in senior positions close to retirement often make up a large employment cost. Understand the context and be ready to take your time evaluating what is right for you.
2. Are You Close to Retirement?
Your age and proximity to retirement age or a planned retirement (as opposed to forced or prompted) could be a major factor in how you respond to an offer. More relevant than your actual age or years from retirement is how ready you are to retire. Are you on track with your savings goals? If you think you are close to leaving the workforce, a retirement package could be a gift. But even if so, think about it and be open to negotiating the details.
3. What If You Say No?
Could there be repercussions if you say no to an early retirement offer? It might not be a major consideration but it is worth thinking about. If your company is having financial troubles, it’s possible that your job is being eliminated or your department is being restructured. Where might you fit in if you don’t leave? The best approach could be a face-to-face, frank discussion with your manager or supervisor.
4. Consider Taking the Buyout and Looking for Other Work
If you’re not ready to retire, nothing stops you from taking the package and continuing to work elsewhere. However, if you’re considering looking for work in the same field or industry, find out about any non-compete clauses. That could be a point worth negotiating.
5. You Can Negotiate. And Your Employer Might Expect You To
Every retirement buyout plan is different, but often there are negotiable elements, such as the size of the buyout, whether it is offered as a lump sum or to be paid in installments, whether you’ll be compensated or reimbursed for unclaimed vacation days, and the possibility of a non-compete clause.
Think about what matters most to you and whether your employer might have some flexibility. Personalizing an early retirement package can make a lot of sense. Your employer might come out the same on a net basis while you make sure you have the money (or other benefits) you need to retire early.
6. How to Reshape the Deal
Take the initiative and think about what matters to you.
● Are you concerned about minimizing taxes? Perhaps push for installments that will be split across two tax years and result in greater net payout.
● Want to work for a competitor after you leave? Perhaps your employer can allow that in return for reducing the payout. In the long run, you could come out further ahead.
● Are extended healthcare benefits a possibility? That could reduce your financial burden or delay the need for government assistance.
● Want to take some of the buyout in stock? Negotiating an equity position in the company (especially if it is primed for growth) could benefit you in the long run—though there is risk.
What else might matter to you? Think about it and suggest it. The worst that could happen is you get a ‘no’.
7. Read Everything and Seek Advice
Read everything. Ask questions. Get clarification rather than making assumptions. Make sure you understand all the fine print (and, of course, the timeline for accepting or rejecting the offer). The best choices are informed ones. It could help to talk with family, friends or a professional, such as an employment lawyer or your financial advisor.
Also, consider the nonfinancial benefits. Will you receive coaching or mentoring services if you’re not yet ready to leave the workforce? Financial planning assistance could be important if you are late in your career and finding work could be more of a challenge.
8. Consider the Tax Impact and See If You Can Reduce It
As noted above, a lump sum payment could be the least tax-efficient way to receive a buyout. Explore other options, including installments. And explore whether an offer could be grossed up so that the amount originally offered before taxes becomes your net buyout after taxes. For example, if you’re in a 20% federal tax bracket, having your employer kick in another 20% could make the offer much more attractive.
9. Consider Bridging Strategies If Close to Retirement
Let’s say you are two to three years from retirement. What could be done to ease any cash shortages over those 24 to 36 months? (Calculate your retirement budget to make sure you are financially set.)
When considering health insurance, the Consolidated Omnibus Budget Reconciliation Act (COBRA) can allow you to receive ongoing employer-based health coverage for up to 18 months. The catch is that you’ll have to pay your own premiums and they will include the employer’s cost as well. It could be more favorable to get health coverage through a spouse’s plan if available, or the open market.
10. How Will the Buyout Affect Social Security?
Leaving the workforce early as a result of a buyout could make you reconsider your plans on when to begin to take Social Security benefits.
For every month that you delay taking benefits (up to age 70), the amount of the benefits you receive for the rest of your life will increase. So it can be worthwhile waiting to claim Social Security as long as you can, even if that means creating a bridge of other income for a few years. This is where consulting with a financial planner could be worthwhile.
Also, note that any severance you receive in a lump sum or over time will be considered a “special payment,” and is classified by the Social Security administration in the same way as bonus or other payments. So severance could increase your eligibility for Social Security benefits.
11. What Does Your Retirement Budget Look Like?
If you are close to retirement age, you should already be running the numbers—estimating your expenses and your sources of income—so that you have a good sense of your degree of financial security.
Use our retirement calculator to quickly crunch your numbers.
This exercise becomes even more important if offered an early retirement package. Consider various scenarios and see whether that affects your decision on the buyout offer as well as how you’ll adapt if you take it.
Will you need to dip into your emergency fund to cover any costs? That is a red flag for your overall savings strategy. Will you lose a few years of maxing out your 401(k)? Options such as an IRA CD or IRA MMA will help you to save pre-tax dollars and lower your tax burden. You may also be eligible for catch-up contributions.
12. Take Your Time
This is a big decision. Don’t feel pressured to respond quickly. Think things through and invite input from other people whom you know and trust. You might have been blindsided by an early retirement plan but see how you can take advantage of the best opportunities that arise from it.
Allan Kunigis is a financial freelance writer based in Shelburne, VT. He has written about personal finance for more than two decades.
Rethinking Retirement
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