You’ve spent years planning and saving for your retirement. And then, out of the blue, your employer hands you an early retirement offer that could change everything.
An early retirement offer is a financial incentive to resign when an employer needs to reduce payroll costs. It could be a boon, giving you the freedom to pursue other activities. Or it could be an unwanted complication that throws a wrench in your retirement plans.
What should you do if you’re offered early retirement? Here are some important questions to ask:
- Do you understand what’s in the package? Early-retirement offers commonly include severance pay, which is usually distributed in a lump-sum payment. For example, your boss might offer one or two weeks’ salary for every year you’ve worked for the company. Also, your employer may offer to extend your job-based health care coverage to help bridge the gap between leaving your job and qualifying for Medicare. You may receive a pension bridge, which includes temporary retirement payments to keep cash flowing until your pension or Social Security kicks in. Additional offerings can include perks such as free financial planning or career counseling to help you move on to another job if you choose.
- Do you need expert financial advice? Analyzing how early retirement can affect your retirement plans, including health coverage, can be complicated. Therefore, it’s a good idea to consider finding a financial advisor. An advisor can help you determine the adjustments you would need to make if taking the offer, such as perhaps downsizing. Additional considerations could include the impact of early retirement on your Social Security, and whether you have the finances to cover a new healthcare plan.
- Are there red flags? Is your company’s offer a sign that the business could be in trouble as they look to cut payroll? Another part of the equation is considering whether refusing the company’s offer could lead to being laid off and being given an inferior financial package you have no choice about. If you don’t have confidence in the short to medium-term viability of the company, taking the offer could prove to be the best move.
Even if you can’t afford to retire early, it could be worth it to accept the offer and then find a comparable job elsewhere, pocketing the package as a windfall. But the success of this strategy hinges on your ability to find another job with a salary similar to the one you had, and in a reasonably short amount of time. It behooves you to research the job market, and to reasonably assess your own company’s prospects, as well as the potential consequences for you if you turn the offer down.
Remember, when your employer offers you voluntary severance, you don’t have to choose to simply decline or accept it. You can also negotiate the package higher or offer an alternative, such as working part-time. If you’re amenable to retiring early but the package on the offer leaves you with a gap in health coverage or too little severance pay, your employer may be willing to sweeten the deal.
Calvin Goetz is founder and president of Strategy Financial Group, an investment adviser and insurance planning group based in Phoenix. This article is intended for general educational purposes and does not constitute investment advice. Goetz has authored two books, Climbing the Retirement Mountain and The Retirement Roadmap. He is a member of the National Association of Insurance and Financial Advisors (NAIFA), and Ed Slott’s Elite IRA Advisor Group™.