Nearly every week, headlines highlight companies offering workers voluntary buyouts or early retirement packages. Some employees accept these offers. Others choose to stay. Deciding whether to take an early retirement offer is both a personal and financial choice.
If you find yourself in this situation, here is what to consider.
What Is an Early Retirement Buyout?
An early retirement buyout is a benefits package a company offers when it wants to reduce its workforce and payroll costs. These packages are often offered to employees nearing retirement or to long-term workers with higher salaries.
An early retirement package may encompass several different types of benefits, including severance pay, medical coverage and bridging benefits.
Severance Pay
Severance pay is usually based on your salary and years of service. Employees with longer tenure may receive larger payouts. You may receive severance as a lump sum or installment payments over several years.
Keep in mind that severance pay is taxable income. If you take a lump sum, it could:
- Push you into a higher tax bracket
- Increase the amount of income tax you owe for that year
Understanding how the payout affects your taxes can help you decide how to receive the funds.
Medical Coverage
Some companies offer post-retirement medical coverage as part of a buyout. Employees who accept the offer may receive health coverage until age 65, when they become eligible for Medicare. Review the details carefully. Coverage may differ from what you had as an active employee.
Bridging Benefits
Bridging benefits are temporary payments that help cover the gap between early retirement and Social Security.
You can begin collecting Social Security as early as age 62.1 However, starting early reduces your monthly benefit. You receive your full benefit at your full retirement age.
With bridging, the company may provide payments that match the reduced Social Security amount you would receive at age 62. These payments continue until you become eligible to claim Social Security.
Determine whether early retirement supports your long-term goals. Start Your Free Plan
How to Evaluate Early Retirement Options
Before making a decision, review your overall financial situation. First, start by calculating whether the buyout payout can cover your living expenses until you plan to withdraw from retirement accounts such as a 401(k) or individual retirement accounts (IRAs). Keep in mind that withdrawing from an IRA before age 59½ may result in a 10% early withdrawal penalty. You will also owe regular income taxes on the amount withdrawn.
Ask yourself:
- Are you healthy enough to continue working?
- Do you want to retire now, or would you prefer to start a second career?
- Will you need additional income in the coming years?
Health insurance is another major factor. Medical costs can be high, especially if you retire before age 65. If the buyout includes medical coverage, compare it carefully to other insurance options.
Consult a Professional Before You Accept
Buyout packages often include detailed terms and conditions. Before accepting an offer, consider speaking with your human resources department to clarify:
- How severance will be paid
- How the buyout affects your pension, if you have one
- How long medical coverage will last
- Whether your coverage will change
After reviewing the details, you may want to speak with a financial professional. They can help you review your savings, retirement accounts, expected income sources and tax considerations. An outside review can help you understand the long-term effects of accepting or declining the offer.
Prepare for What's Next
For some employees, an early retirement offer comes at the right time. For others, it can be a tough decision, especially if they want to keep working. Either way, think about how accepting the offer could affect your long-term finances and your ability to live comfortably in retirement.
Review your options carefully before deciding. If you are unsure, consider speaking with a financial professional before signing.
Consider your financial needs, health, and benefits when weighing early retirement. Start Your Free Plan
Sources
- Starting Your Retirement Benefits Early. https://www.ssa.gov/benefits/retirement/planner/agereduction.html.
