Should You Consider Early Retirement?
Dear Rich Lifer,
Companies such as Delta Airlines, Boeing, and Coca-Cola have been offering their employees cash to leave their jobs.
These deals are often called early retirement, voluntary severance, or buyout packages. They target senior employees because they tend to earn higher salaries.
For some, this offer can seem like an incredible opportunity, especially for those who are already close to retirement or have been considering a job change.
However, for others, this decision can be extremely complicated and stressful because it forces employees to choose between a rock and a hard place, so to speak.
You can either give up the security of a paycheck (in an economy when jobs are already scarce) or stick it out at an insecure job without any guarantees of severance if layoffs continue. In fact, we are already seeing that this is happening with companies like Disney laying off thousands.
Increased pressure comes with the deadlines these deals often present. Under federal law, employees often have up to 45 days to consider such an agreement, plus seven days after signing in which to change their minds.
Today we will break down what you should consider if presented with one of these early retirement options…
Is The Offer Good?
This question may seem like a no-brainer, but it’s an important place to start when considering these types of propositions.
The first step to determining whether an offer is good is understanding the offer.
According to David Kudla, CEO of Mainstay Capital Management LLC, a typical severance payment might amount to two weeks of pay for every year of employment, up to a cap such as six months.
Cobra, a federal law, states that companies with 20 or more employees generally must allow departing employees to stay on their healthcare plan for up to 18 months.
However, while many companies subsidize workers’ premiums, they can require former employees to pay up to the entire premium, plus 2%.
Additionally, some companies offer outplacement services to help their employees find new jobs. They also may grant accelerated vesting of stock options, according to Dana Kravetz, an employment lawyer at Michelman & Robinson LLP.
As we mentioned before, many of these buyouts target older employees. If you are such an employee, you should make sure your employer will let you start benefits at a younger-than-normal age or retain higher benefits, despite working fewer years.
Finally, remember that severance offers do not come with much room to negotiate unless you have a strong legal claim, such as a whistleblower, sexual harassment, or a discrimination claim.
Should You Take the Offer?
Once you have reviewed the offer, it’s time to consider how this offer will impact your finances.
Scott Dauenhauer, a financial adviser in Murrieta, California, notes that the closer you are to your planned retirement, the more a buyout offer makes sense to take.
Dauenhauer even says he advised his own mother to take such a deal a year before her planned retirement. However, he admits that if his mother had been, say, five years from retirement he would have told her not to take the deal.
Do the math — will the severance offer last until you hit your planned retirement age or until you find another job?
Make a budget and be sure to include any extra you will spend on health insurance or income tax since the severance payment might push you into a higher tax bracket.
Next, estimate the potential hit to your retirement income.
Matt Hylland, an adviser at Arnold & Mote Wealth Management LLC, states, “Accepting a buyout offer can mean lower Social Security benefits, lower pension benefits, and increased early 401(k) withdrawals.”
If you put your 401(k) contributions on hold or have to tap your retirement savings early to make ends meet, you will likely collect less for retirement.
Remember, you will owe income tax on withdrawals from a traditional IRA or 401(k), plus generally a 10% penalty if you are under 59½, or 55 in the case of many 401(k) plans.
There are also potential consequences when it comes to Social Security, as Hylland stated.
The Social Security Administration’s annual statement estimates benefits by assuming you continue to earn your current salary until you reach one of three retirement ages — 62, 70, or so-called “full retirement age,” which is 67 for people born after 1959.
The Administration’s formula takes an average of your highest-paid 35 years of working, before age 60.
If you feel like you may need help with all this math, check out https://www.ssa.gov/ which has its own benefits calculator.
Ways To Keep Earning
If you decide you want to take a severance offer, you may still want to consider other ways to continue to make money after retirement (like this one!)
There are countless ways for retirees to continue to make money.
If you are a retiree that loves kids or animals you could consider becoming a part-time caretaker to either, or both!
Do you have extra space in your home? You can easily rent out rooms on sites such as Airbnb or HomeAway. Or, if you are a retiree who wants to travel a lot, you can even rent your whole home and easily make enough money to supplement your retirement funds.
Making a decision about early retirement is difficult, but I hope this advice can help point you in the right direction.
To a richer life,
The Rich Life Roadmap Team