Sometimes a company will offer an early retirement package to employees. This has certainly been the case during the summer of 2020 for industries like airlines.
Analyzing these early retirement offers is a high stakes and complex process. There are several important parts of an early retirement buy-out offer that must be considered.
Pension Formula: If you have a pension plan as part of your employment, will early retirement impact that pension? Is your pension calculation going to be negatively impacted by your decision to retire early? For instance, perhaps the pension formula is based on your top five earning years. Normally, those would be the last five years of someone’s employment and therefore an early retirement could lead to a decrease in the expected pension. Also, the timing of the pension start date may be part of the offer. Maybe the pension can be started early without the standard age related decrease. For example, a 62 year old may normally received a reduced pension if they start before age 65, but the early retirement package allows them to receive their full age 65 benefit at age 62.
Pension vs. Lump Sum: As part of an early retirement, the company may offer a lump sum option in addition to multiple payout options. Payout options can be confusing especially if you need to factor in a spousal benefit. A detailed pension option analysis is extremely helpful when making this lifetime decision. For more on this topic, check out the podcast called Lump Sum vs Pension.
Severance, sick time, vacation time, other time related perks: Usually a severance package is offered when an employee leaves against their will. However, sometimes employers will provide a severance package as part of an early retirement package. This is usually a payment based on the number of years worked at an employer. Also, it is important to monetize unused sick and vacation time. For instance, an employer may compensate an employee for a portion of unused sick time as a lump sum payout.
Health Insurance: Many employees rely on their employer for health insurance. This is why for many early retirement packages, health benefits are of extreme importance. This is particularly true for employees with ongoing health concerns. While changes to healthcare rules and subsidies have alleviated a lot of pressure associated with obtaining health insurance outside of the employer, this is still a top consideration. Some companies offer continued coverage in addition to mandated continuation via COBRA. For instance, some employers may offer a couple of years of continued coverage, a health subsidy until reaching standard Medicare age (65), or even a Retiree Medical Account (RMA) which acts similar to a Health Savings Account (HSA). When analyzing the health insurance benefits of an early retirement package, it is important to know the options available outside of your employer – in other words, what can you obtain on your own?
Other benefits: Depending on an employees situation, other supplemental benefits might be important to consider. Benefits such as life insurance, disability insurance, and travel perks might be offered as part of an early retirement package. For instance, an airline might offer enhanced travel privileges on top of their standard retiree travel benefits. For people who aren’t insurable due to a medical issue, keeping some level of life insurance already in force through their employer may be extremely critical. It is important to understand the portability of these benefits.
Social Security: Income is the key factor when determining the success of a retirement. Many people rely on Social Security for a large portion of their retirement income. This is why it is important to coordinate an early retirement package with your Social Security benefits. The timing of early retirement needs to work with the timing of turning on Social Security. This doesn’t mean you must take Social Security early. It means it is vitally important to develop a Social Security maximization and timing plan before deciding on accepting a retirement package. Like a retirement package, Social Security decisions are lifetime decisions. Some early retirement packages offer bridge-income which helps an employee fill an income gap between when they take early retirement and when they are eligible for Social Security.
The bottom line when it comes to early retirement packages – do your homework. It’s a lifetime decision!
Daniel J. Wendol is the owner of the Dolphin Financial Group. He is a CERTIFIED FINANCIAL PLANNER™, licensed as an Investment Advisor Representative, and also has an insurance license. He combines the investing and insurance worlds with a focus on retirement. ‘
Each week Dan hosts Dolphin Financial Radio, a podcast about the wide-ranging issues people face leading up to and through retirement.
Dolphin Financial Group acts in a fiduciary capacity to help people make life’s toughest financial decisions.