Should I Accept an Early Retirement Offer?

Nearly every week there are headlines about companies that offer workers voluntary buyouts or early retirement packages.

Some employees opt to take them, while others don't. Taking an early retirement offer is a personal — and financial — decision. If you ever find yourself in this situation, here's what you may want to know and consider.

What Is an Early Retirement Buyout?

An early retirement buyout is a benefits package companies offer to employees when they need to downsize or scale back their workforce and payroll obligations. These packages are generally offered to workers nearing retirement, or to experienced and long-time employees who have higher salaries and compensation.

An early retirement package may encompass several different types of benefits, including severance pay, medical coverage and bridging:

• Severance pay: Severance pay is typically based on your salary and years of service at your company. Those with the longest tenure may get a more generous severance payout. You may receive severance in the form of a lump sum or spread out in installment payments over a number of years.
• One important thing to remember about severance: This payout is subject to income taxes, so receiving payment in the form of a lump sum could have several tax implications, such as paying a higher tax rate on this money or being pushed into a different income bracket that increases your tax obligations.
• Medical coverage: Many companies also offer post-retirement medical benefits as part of a buyout package. Employees who accept a buyout typically receive medical coverage until they are 65, when they become eligible to receive health coverage through Medicare, a government-sponsored health insurance program.
• Bridging: Bridging is when a company offers temporary benefits to help you bridge the gap between early retirement and when you can begin collecting Social Security. You can start to collect your full Social Security monthly benefit amount when you reach full retirement age, but you can start receiving benefits as early as age 62.¹ However, if you start receiving benefits early, your monthly benefit could be reduced. With bridging, what you receive from your company before you're eligible for Social Security is typically equal to what your reduced monthly benefit will be at age 62.

How to Evaluate Early Retirement Options

Whether you decide to take an early retirement offer will depend on several things. First, consider crunching the numbers and determining whether the payout offered is enough for you to live on before you'll need to withdraw money from your 401(k) or individual retirement accounts (IRAs), if applicable, since these retirement accounts come with certain age requirements for withdrawal. For example, if you begin withdrawing from your IRA before age 59 1/2, you may face an early withdrawal penalty and an additional 10 percent tax on the money you withdraw, alongside your regular income taxes.

Your health and health insurance coverage are two other considerations. Are you healthy enough to keep working? Are you not ready to retire or would you like to try a second career that produces ongoing income? All of these things affect whether you can financially afford to take a buyout.

Additionally, health insurance has become increasingly expensive, and some people can't afford to pay out of pocket for this expense. If you have ongoing health needs and were considering retirement in the near future anyway, post-retirement medical coverage might be more appealing.

Consult a Professional Before You Accept

Buyout packages come with a lot of fine print, so before you agree to accept the offer, you may want to talk to your company's human resources team about all your options. Consider getting details on the package's structure (for example, it might only allow you to receive severance pay in a lump sum). If you're entitled to a pension through work, you may want to ask how the early retirement offer will affect your pension benefit and whether it will reduce the amount you ultimately receive. If health care coverage is part of the package, consider asking how long you can receive this benefit and whether you'll get the same plan and level of coverage you received as an employee.

After you get these details, it's may still be a good idea to seek outside advice. You could consider talking to a financial professional and reviewing your current financial picture, including money you have in regular savings accounts and retirement accounts. A financial professional may be able to help you weigh the financial implications of accepting or rejecting the offer so that you make a sound financial decision.

Prepare for What's Next

An early retirement offer may come at just the right time for some employees, but for others, it may lead to a very difficult decision — especially if they'd prefer to keep working. Regardless of which group you fall into, you may want to consider how taking an early retirement offer could affect your finances long-term and your ability to live comfortably in retirement.

Try to weigh all your options before you make a decision, and if you're still unsure, consider consulting with a financial professional before signing on the dotted line.

Sources

1. Starting Your Retirement Benefits Early. https://www.ssa.gov/benefits/retirement/planner/agereduction.html .