Evaluating An Early Retirement Offer: What To Consider

When companies need 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 may offer these packages to senior management or employees who have been working for the organization the longest.

If you’re presented with one of these offers, does it make sense to accept it? You may want to consult with a financial advisor before making an official decision. As you consider your options, here are some of the key things you need to know to make the best choice.

Were you offered an early retirement package? Here’s what it means

Faced with rising costs and perhaps lower revenues, companies may opt for this route rather than laying off long-term staff in order 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. A better offer might not come along, and the employee may simply be laid off later with no financial benefit, if the economic situation worsens.

What is typically included in an early retirement package?

There are many variations of early retirement packages, and what your company offers depends upon many factors. In general, an early retirement package may include:

• A cash payment. This amount is typically based on how long you’ve been with the company. This payout is usually a lump sum, but it can be paid out over several years.
• Payment 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.
• 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 or career
• Financial-planning services

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 your personal financial situation and goals. Here are things to consider.

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 Lorraine Ell, senior financial advisor and CEO at Better Money Decisions in Midland, Michigan. “Staying can put you at jeopardy for getting laid off without compensation or worse, fired.”

While it’s possible the company is experiencing just a temporary decline in revenue, if it’s going through more serious or longer-term issues, the situation may not improve. 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 the impact on your finances, such as having to tap your nest egg early or being unable to continue contributing to it. You should know, however, that accepting an early retirement offer doesn’t mean you have to retire. 

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: “The younger you are, the more stress will be placed on retirement assets.”

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?
• Do you have hobbies or other pursuits to stay busy?

While early retirement may sound 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 think.

How your Social Security benefits might be impacted

Social Security could play a big role in your retirement income, and retiring early could impact those benefits in more ways than one.

“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. .

Before accepting an early retirement offer:

• Calculate your Social Security benefits to see how much retiring now will affect your payout later.
• Figure out what Social Security benefit you’ll get if you retire now (if applicable).
• Determine how much lifetime Social Security income you might lose by claiming benefits early – something you may need to do if you take early retirement.

How your health care needs will be addressed 

Health care costs can be a huge issue if you retire before you’re eligible for Medicare. Expensive premiums and out-of-pocket costs could whittle down your nest egg. 

Of course, even if you decide to take the early retirement offer, you may choose to keep working for another employer that provides you with health insurance. Otherwise, make sure to research the cost of buying coverage yourself if taking early retirement will force you to go without employer coverage or Medicare for an extended period of time.

Can you negotiate an early retirement package?

If you decide you’ll be leaving the organization, you might as well try to negotiate a better package. Talk to others who have been through the experience, research the topic online or consult with an expert who has helped others to figure out what is reasonable to request.

Also, be prepared to provide the rationale for why you’re asking for a better package. If your employer can’t offer more money, there may be another parting gift they’re willing to throw in, like a laptop and equipment you get to take with you.  

Since early retirement salary payments are generally taxable, be sure to ask if your payout is gross or net of taxes. If you 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.

What if you don’t want to accept an early retirement offer?

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 review any severance package 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 even suggests offering to reduce your hours or transfer health insurance to a spouse’s company, if possible, to preserve your job. Or, ask if you can be hired as a part-time consultant without benefits if you take the early retirement package. 

If you accept the offer or are forced into retirement but still want to work, 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.”

Bottom line

An early retirement offer could be a blessing or a curse, depending on the quality of the offer, whether you want to keep working or not and how you’ve planned your finances up to that point. Regardless of the offer, read it carefully. “Make sure you understand all the fine print,” cautions Tyler.

 Also, don’t rush the decision. It’s truly a big one, so take the time to figure out what’s best for you and your family.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

— Bankrate’s Rachel Christian contributed to an update of this story.