With ongoing economic challenges due to the COVID-19 pandemic, a number of companies are now offering some workers early retirement. There are potential benefits for all: early retirement reduces top-line costs for the business, while providing qualifying employees with the opportunity to kick-start their post-work life a few years earlier than expected – and usually, with a chunk of money in the bank.
Is early retirement right for you? First, you’ll need to fully understand the ins and outs of the retirement package being offered. If you’re given the chance to retire early, here are seven questions to ask first:
What’s the alternative?
If you don’t accept the retirement buyout, what will happen? Often, the offer of early retirement is a signal that your long-term job security may be at risk. Assess your position within the company. How long have you been in the position? Have there been any major changes, challenges or restructures in recent months? Are you confident that a future severance isn’t in the cards? This is a great time to seek input from colleagues or your manager. Keep in mind that a retirement package offered up-front will almost always be more lucrative than what you’ll receive in a potential severance later
What’s the timeline?
How long do you have to decide whether or not to accept the offer? If you do accept, when will retirement start and when will the package go into effect? This is a great time to crunch some numbers. Review your assets – including what’s in your savings account as well as investment accounts – and compare that against your day-to-day living expenses for the next few decades. How do the numbers stack up with and without early retirement? Importantly, are there any major costs you see emerging soon, such as a new car or helping a dependent attend school or buy a house? All these costs can influence whether or not the early retirement timeline makes sense.
Is medical insurance on the table?
Leaving your job normally means giving up your company’s medical insurance policy. Traditionally, retirement means you can begin receiving Medicare – but if you’re retiring early and under 65, you might find yourself without health coverage. Many companies do make insurance cover a part of the early retirement offer, so be sure to check what’s included, what care is covered, and for how long. If health insurance isn’t included, factor this into your cost analysis; especially if your spouse or dependents have been previously covered under your policy.
What are the tax implications?
Be aware that receiving a lump sum retirement package means you’ll need to pay taxes on it; and depending on when you receive that sum, it could put you in a higher tax bracket. It’s also important to know that IRS retirement account withdrawal rules and penalties still apply if you withdraw funds before age 59½. Speak with a tax professional to help understand how taxes will affect your early retirement options and how to reduce your tax liability.
Can you afford it?
Ideally, the right early retirement package will let you retire early without needing to tap into your retirement accounts that may lose their tax advantages when you make early withdrawals. Is the package on offer enough to supplement your income? If not, are there other ways you can reduce expenses in the meantime? If you’ve been hankering for more free time and a simpler lifestyle, it could be a good time to consider the possibility of downsizing your home or lifestyle in order to take advantage of an early retirement offer, without depleting your retirement savings in a non-tax-advantaged way.
What’s the broader impact on your life?
The choice of whether or not to take early retirement isn’t just about the money. How do you feel about the idea of never going in to the office again? Are you ready to say goodbye to colleagues? Are you excited to finally invest more time and energy into hobbies and families outside of work? While the financial implications of early retirement will have a big role to play in your financial decision, it’s critical to consider the broader impact on your life. Early retirement can be an exciting opportunity – but it’s all about what you can afford and what makes the most sense for your unique situation.
For more on retirement, watch this short educational video about saving for retirement or this one on saving through retirement through individual retirement accounts (IRA).
