Updated: Oct 29, 2021
So you've been offered an early retirement — should you accept it? Depending on your personal financial condition and the financial situation of your employer, an early retirement plan might be a blessing or a disaster. Before you make a decision, you should thoroughly examine every aspect of the offer and your personal financial situation.
What Are Early Retirement Offers?
An early retirement offer is a package of incentives offered by a company to entice employees to leave their jobs early. Many businesses are providing early retirement packages to their employees in today's corporate environment. Employees who are nearing retirement age and have worked for the firm for an extended period are usually given this option. Employers may offer early retirement to individual workers or a department as a whole.
Why Are Early Retirement Offers Made?
Companies offer early retirement packages to change their workforce without having to fire anyone. This may be due to various factors, including a need to reduce costs, a change like the job, a desire to hire a new workforce, and much more.
What to Look For In the Offer
Severance pay is money or perks provided by an employer to an employee after their employment ends. In the United States, no regulations dictate the amount of severance compensation that early retirees must receive. However, employees are typically granted one to two weeks of severance pay for each year of service to the firm. To make the offer more attractive, a company may give additional years of service. That incentive in service not only boosts the severance package but may also help to boost future payouts from the corporate pension plan.
Medical insurance costs have risen, reducing the number of firms that provide medical care to their retirees. As a result, early retirement packages with this benefit are becoming increasingly scarce. However, if offered, the benefit can cover retired employees until they are Medicare-eligible and may provide additional coverage beyond 65. As outlined in the Consolidated Omnibus Budget Reconciliation Act, an offer to pay the cost of your company's health insurance coverage is becoming more prevalent as part of early retirement packages (COBRA). COBRA policies enable you to keep your employer-sponsored coverage for up to 18 months, and in some instances, even longer, depending on the circumstances. Although it's uncommon for early retirement packages to cover premiums for the whole term, several give up to six months of premium payments. Companies with more than 20 workers are required to provide COBRA coverage, but they are not required to fund any costs.
Effects on Pension
If your company offers a typical pension plan, your retirement benefits are determined by your age, years of service, and yearly pay. To obtain the maximum benefits, you must generally work until your company's standard retirement age, typically 65. This implies that if you accept an early retirement offer, your benefits may be reduced. Because pension benefits generally accrue quicker as you get closer to retirement, the difference between this reduced pension and a full pension might be significant. On the other hand, your employer may offer you higher pension benefits until you reach the age of 62, when you may begin receiving Social Security. Be sure you understand the effects on your pension and what your employee is offering before you decide.
Your employer may offer other perks as a part of your early retirement, such as:
Financial planning assistance
Job placement assistance
Employer-sponsored life insurance
Remember, just because certain things aren’t listed in your early retirement offer does not mean you can’t negotiate for them.
Personal Aspects to Consider
Can You Afford to Retire Early?
You can't merely look at what an early retirement package is offering to decide whether or not to take it. You must think about your entire financial situation. Determine your retirement income sources and the annual amount you may expect from each. Then, calculate your yearly retirement costs, including taxes and inflation, to ensure that your income will be sufficient to cover them. You may discover that accepting your employer's offer allows you to maintain the retirement lifestyle you desire. But keep in mind that they are merely estimations. Include a reasonable buffer in your budget if your costs rise, your income falls, or you live longer than you anticipated.
How Will This Effect Your Social Security Benefits?
Benefits from Social Security begin at the age of 62. As a result, younger retirees are unlikely to qualify for Social Security payments. If you start receiving benefits before reaching full retirement age, your monthly payments will be reduced. For example, if you sign up for Social Security at age 62 and your full retirement age is 66, you may get a 25% lower monthly benefit than you would get at age 66.
What Happens if You Don’t Take the Offer?
If you decline to retire early, you may be able to continue working for your current company and flourish. You may even get a more significant second early retirement offer than the first one. However, you might not be that fortunate. There is no assurance that you will be offered this opportunity again. Use your best judgment and seek expert guidance if the repercussions of saying no are challenging to anticipate.
Schedule A Consultation with an Experienced Financial Advisor
When faced with an early retirement package, having the assistance of a skilled financial advisor can be beneficial. A financial advisor can help you analyze the various scenarios around accepting or rejecting the offer and how well those scenarios fit with your financial needs and goals. Here at Fourth Avenue Financial, our first priority is your overall financial success. We want to help you develop, implement, and monitor a strategy designed to address your individual situation, whether you’re retiring this year or many years from now. If you are ready to start planning for your financial future, we are here to help. Contact us today at (304) 746 7977 to schedule a meeting with one of our experienced financial advisors or schedule online: https://calendly.com/fourthavenuefinancial/introductory-zoom.
Securities are offered through J.W. Cole Financial, Inc. (JWC) Member FINRA / SIPC. Advisory Services are offered through J.W. Cole Advisors, Inc. (JWCA). Fourth Avenue Financial and JWC/ JWCA are unaffiliated entities.