In an effort to reduce costs, employers frequently turn to reductions in staff.
If you’ve been with your employer a number of years, you may be given an early retirement offer.
Depending on how generous the offer is, and what your personal options are, you might want to take the offer.
There are several considerations that need to be evaluated before deciding to take an early retirement offer.
A significant issue in any one of them could make your decision for you.
The Severance Package – If Any
A severance package, if one is offered, is often one of the major incentives to accept an earlier retirement offer.
A typical severance pay arrangement will provide one or two week’s pay for each year the employee works for the company.
For example, if you worked for your employer for 20 years, you may be offered 40 weeks severance pay.
It can be more generous if you're in an executive position. You might be offered as much as one month’s pay for each year you’re employed by the company. 10 years of employment would get you 10 months of salary, or roughly 40 weeks.
In most cases:
Severance pay is made in a lump sum.
That's done so that the employee will still be eligible for unemployment benefits. That eligibility in itself may be another factor determining whether or not you should accept the early retirement offer.
The attractiveness of the severance pay will depend on your personal situation and how generous the offer is.
If you've only been with your company a few years, the severance package may not be an important issue.
The Impact on Your 401(k) and/or Pension
Here you'll be dealing with the time value of money.
With pensions, the monthly benefit you'll receive is a combination of salary and years of service. If you were planning on having a certain pension benefit at 65, but the offer comes at age 50, your pension benefit will be a good deal smaller.
The same is true of a 401(k) plan.
For example, let's say you're 50 years old and in 20 years with your company you've accumulated $300,000 in the 401(k) plan. But you had hoped to work with your employer through age 65, when the plan would grow to over $1 million.
By continuing to invest your plan – but no longer contributing to it – you calculate it will only grow to about $700,000. If that's not enough for you to fully retire at 65, you may want to consider continuing with the company and making additional contributions.
Because of either the pension or 401(k) situations, you may lean toward staying with your employer, if that option is available.
Your Medical Coverage
For many, medical coverage will be an even bigger consideration than retirement benefits.
The fact is:
For most people, the least expensive health insurance option is an employer paid plan.
If you leave your employer, you'll lose that critical benefit. In all probability, your employer is paying most of the cost of your premium.
For example, if the full premium is $1,000 per month, you may be paying only $400.
If you take the early retirement offer, you’ll have two options.
- Get on your employer’s COBRA plan
- Get coverage on the health insurance exchanges.
Neither is an inexpensive option.
COBRA would force you to pay the entire premium each month. The plan administrator can also add a 15% administrative fee to the premium.
If the base premium is $1,000, the payment can be as high as $1,150. Also, COBRA coverage will end after just 18 months.
Health insurance exchange
You can get an estimate of what premiums will be on the health insurance exchange in your state by using Healthcare.gov’s plan estimator site. It will show you the available plans in your area, without your having to go through the exhaustive application process.
But be ready to be shocked. Premiums are high, and usually come with very high deductibles and out-of-pocket limits. That will be a financially dangerous position to be in if you take early retirement.
Of course, you have to compare either option against the potential to secure another job with health insurance. If your occupation is in high demand, this may not be a problem.
But if there's not much call for what you do, or re-employment is unlikely due to your age or other factors, you may want to stay with your current employer as long as you can.
Can You Afford to Retire Early?
This is where you're going to have to do some serious number crunching.
If you're at a point in your life where the major obligations are behind you – your mortgage is paid, and your kids are done with college – early retirement may be an option.
This is especially true if your retirement savings are on track, and you have other liquid assets to cover you between now and retirement.
But if you're still supporting a young family, you have a mortgage on your home, and financial resources are fairly slim, you may want to continue on with your employer.
It may be time and money well spent sit down with the financial advisor to get an objective, third-party opinion of your situation and what you should do.
Even if early retirement isn’t financially possible, you should consider the implications of getting another job.
- Can you find one at an equal or higher salary?
- Or will you be likely to take a major pay cut?
- Under a worst- case scenario, is it possible you'll need to retool into an entirely different career?
All these factors need to be considered before accepting or rejecting an early retirement offer from your company.
How Do Social Security Benefits Play Into Early Retirement?
If you're just a few years away from collecting Social Security, this can be a deciding factor.
The combination of a generous severance package, as well as an already well funded 401(l) plan could bridge the gap between now and when you're eligible for benefits.
Early retirement can negatively affect your Social Security benefit.
The Social Security Administration is not entirely clear on how benefits are calculated. But it is known that it's based on a combination of your annual income and your number of years of employment.
You can use the Social Security Administration’s Retirement Estimator to run different scenarios. It may enable you to make a decision that will maximize your benefit.
What if You Decline the Early Retirement Offer?
This is a question that varies anytime an employer offers early retirement.
In some situations it's optional, in which case all these considerations are relevant.
But if it's really a layoff with benefits, you'll have no choice. You'll have to take the offer, then get on with your life.
Now it may be that a general early retirement offer has been made to multiple employees. The company is doing this to reduce operating expenses. But even if it is generally not considered optional, it is possible your employer will make an exception in your case.
If that proves to be true, you'll need to be asking a lot of questions. For example, if it is possible for you to stay on, will that be a permanent arrangement – or just until the next round of layoffs?
But there's always a major risk in not accepting an early retirement offer.
In many situations, the employer makes the offer. If you accept it, you go on your way with all the promised benefits.
But if you reject it, in attempt to stay on, the offer may not be available for a future layoff.
If you do plan to stay with your employer, you'll need to do a serious evaluation of the company's future. If early retirement offers are being made because the company is on shaky ground, turning down the offer may be just delaying the inevitable.
In that case, the safest strategy may be to simply take the offer, and move on.
Can You Take the Package and Still Find Another Job?
So far we've been discussing continued employment prospects with your current employer.
But the potential for employment outside your current employer should also have a material effect on your decision.
It may even be that you've grown stale in your current position, and have been looking for a new opportunity. In that case, view the early retirement offer as a gift. Your employer will be bankrolling your move to another job.
If the early retirement offer is generous enough, you may even be in a position to accept a job at lower pay. That will open up more options on the employment front.
When a new job isn't realistic
However, the situation becomes much more complicated if your chances of becoming re-employed are slim.
There’s an excellent chance you’ve been offered early retirement because there are problems in your entire industry, and not just with your employer.
You have to do some serious investigation to determine if there's another job out there that will pay a comparable salary, as well as allow participation in a 401(k) plan and provide company-sponsored health insurance.
An early retirement offer may be a nice problem to have. But it may also mask a much more serious situation.
And that's why you have to be very careful about turning it down.