Picture it: You're sitting at your desk when your manager calls you into his or her office. You enter the room without any context for the meeting — and find that you're a little nervous. After a few pleasantries, your manager tells you the reason for the impromptu conference: The company wants to offer you an early retirement buyout.
You might not know whether to be upset or elated at first, so you settle for stunned. Several questions begin to race through your mind: Are they offering me money to quit my job? Should I accept the offer? What does this mean — and what's the catch?
Companies generally offer early retirement buyouts to employees who are near retirement to reduce payroll costs. When faced with an offer, however, it could be difficult to decide if it's the right choice for you.
Understanding the advantages and disadvantages of an early retirement buyout can help you make your next move with certainty.
The Buyout Package
What's in the package? This may be your first question, and it's an important one to consider before accepting an early retirement buyout. Often, the makeup of the package will depend upon how close you are to retirement age.
If you are near retirement age, the early retirement package may credit you with extra years of service so you could start collecting retirement payouts. Some packages may offer to pay for health benefits until you are eligible for Medicare. If you are not near retirement age, the package may instead provide severance pay based on a formula.
The package may also be based on what the company offers to its retirees. Is there a pension? Do they offer health benefits to retirees? Are you able to access benefits early? These could all affect what's being offered.
Depending on the company, early retirement buyouts come with different payment terms. You may be able to negotiate payment terms if they aren't already set in stone. If you want to invest the money or pay off a large expense, for example, you could consider accepting the payout as a lump sum. Also, some people choose to take payments over several years, so they don't have to pay taxes on everything all at once.
A Taxing Decision
If you accept an early retirement buyout, prepare yourself for a tax bill. Packages like these are not tax-free, and neither are early 401(k) withdrawals. If you're under age 59 1/2, you will also have to pay a 10 percent penalty from the Internal Revenue Service (IRS). This is just one reason your decision to accept a buyout could largely depend on how close you are to retirement.
Determining how an early retirement buyout will affect your Social Security benefits could require some mental gymnastics. In general, the longer you wait to claim Social Security, the bigger your check will be. Are you able to delay receiving Social Security benefits? That could depend on your financial cushion, the size of your severance package and your overall health.
To Your Health
Many early retirement buyout packages offer help with health benefits. This may be the case if you are close to retirement age. Why? Because you're also close to being eligible for Medicare. Check to see if your company offers health benefits to retirees, and whether or not you could claim those benefits early.
If your company does not offer these things — and you're not yet eligible for Medicare — you'll need to find insurance on your own.
Even if you choose to accept an early retirement buyout, retirement is actually optional. Of course, you could choose to enter your golden years a little earlier than expected, but you could also look for a new job. This may be the case already if you're not close to retirement age.
If you're nearing retirement age, however, there are decisions involved. You might want to run the numbers to see if you could afford to retire. Consider looking at how much money you have saved (in addition to severance payments) and comparing that total to your expenses.
Is there enough money to cover your expenses? If not, you may need to look for a new position. You could also think about downsizing or selling large assets, such as your house, to help pay for your retirement.
As with most things that involve finances, what you decide depends on your particular situation. With an early retirement buyout, you'll want to consider crunching all the numbers and realistically weighing your options before accepting.