Evaluating an Early Retirement or Voluntary Severance Offer
You have spent decades planning for retirement. Just when you think you have everything figured out and a concrete retirement plan in place, you get thrown a curve ball.
You were planning on retiring in a few years, but now your company is offering you an early retirement offer package. Sure, it comes with some extra pay - But what else should you consider? How do you begin to evaluate an early retirement offer? Should you accept the offer?
Whether your employer calls it a voluntary severance package, a retirement buyout, or an early retirement offer, your options are the same. You can choose to accept the offer, and retire soon with some added benefits, or reject the offer and continue working.
One important note: Although you have been planning for your retirement for decades, often you don’t have long to act when deciding on whether to accept an early retirement offer. Collins Aerospace (formerly Rockwell Collins) employees who recently received notification of a voluntary severance package in mid-December have until February 1st to decide whether to accept or deny the offer. That leaves Collins Aerospace employees just 45 days, with the holidays in the middle, to make a very important decision.
Need Help Determining the Benefits of an Early Retirement Offer?
If you need help evaluating your early retirement offer immediately, contact us today. We have helped employees of Procter and Gamble (P&G), Rockwell Collins (Collins Aerospace), and other companies determine if a voluntary severance package is right for them. We are located in North Liberty, Iowa and work directly in-person with clients in the Iowa corridor, and we serve clients across the United States virtually.
If you have time and want to begin to weigh the pros and cons of an early retirement offer on your own, here are a few things to consider:
Benefits, and Drawbacks, of Accepting an Early Retirement Offer
For older workers who had been delaying retirement or who were nearing retirement, an early retirement offer can be a tremendous opportunity.
The early retirement incentives provided by the voluntary separation package may include extended health benefits, a lump sum bonus, future annual payments, added years of service for pension benefits, and more. For someone close to their planned retirement date, an early retirement offer can put them in better financial shape than they would have been otherwise.
However, accepting the offer can mean lower social security benefits, pension benefits, increased 401k or IRA withdrawals early in retirement, increased health care expenses, and many more complications. Therefore, accepting an offer before you are financially ready to retire can have severe consequences.
Should You Accept an Early Retirement Offer?
The most important factors in your early retirement offer decision are:
Your Health Care Options
While it is impossible to give advice specific to your situation today without more personal information, here are the most significant topics to consider when evaluating your early retirement offer:
Managing Your 401k, IRA, and Other Retirement Accounts When Considering an Early Retirement Offer
Accepting an early retirement offer or voluntary severance package may require you to begin withdrawals from your 401k plan, IRA, or other retirement accounts sooner than you originally expected.
Although you do not face any 10% early withdrawal penalties if you are age 55 or older and become separated from employment (This is commonly known as the “Age of 55 Rule”), withdrawing from your retirement accounts early will have a material impact on your long-term net worth.
Extra years of retirement can take a toll on your retirement nest egg.
Retiring a couple years earlier than planned can result in hundreds of thousands in extra expenses that your retirement portfolio must now support, and also limits the growth of your assets already invested since you have to spend instead of save.
Can your retirement portfolio withstand a couple fewer years of contributions and a couple more years of withdrawals?
Take Advantage of an Early Retirement Offer with Roth Conversions
However, for those with adequate retirement account assets in tax deferred retirement savings accounts (like 401ks and IRAs), an early retirement offer opens up the potential to save significantly on future taxes.
Those who accept an early retirement buyout offer from their company will likely be facing a year or two of reduced income before social security benefits kick in. These years of reduced income can be the perfect time to convert some assets within your 401k or traditional IRA into a ROTH IRA.
We find for many clients that ROTH conversions in an early retirement scenario can increase asset longevity and greatly reduce their total taxes paid.
Health Benefits and Early Retirement Offers
Health care has become one of the largest expenses for a retiree, even with good insurance. For many, a company’s contribution to your and your family’s health insurance premium is critical to keeping medical insurance, and care, affordable.
If you are lucky, your voluntary severance package will extend your benefits until you are age 65 and become eligible for Medicare. However not all those offered an early retirement package are so lucky.
If you will be on your own paying for health insurance after accepting an early retirement offer, COBRA insurance is always available to extend you or your family’s coverage for up to 18 months (or 36 months for some members of your family under certain scenarios). But this coverage is expensive.
You also have the option of entering the open market for a policy, but will be faced with the option of very expensive premiums, or very high deductibles.
The Impact on Your Social Security and Pension Benefits from Accepting an Early Retirement Offer
A major consequence of accepting an early retirement offer is a likely reduction in social security benefits, and your future pension payments if applicable.
If you plan on accepting a retirement buyout offer and remaining retired, your social security benefits will be reduced. If you have been nearing retirement, you have probably received your estimated social security retirement benefits from a statement that looks like this:
But, if you accept an early retirement package from your current employer, the benefits listed on your statement is not what you will receive.
These estimated social security benefits assume that you continue to work, and continue to make your current salary, until you begin to claim social security. For a retiree who accepts an early voluntary severance package, your future income will likely be significantly reduced. This means lower future social security payments.
So, the first step is to determine what you can expect for social security benefits if you do accept your employer’s early retirement package.
At Hylland Capital, we use several different methods to determine your future benefits and your optimal social security selection.
If you are evaluating the early retirement offer on your own, you can start by using the Social Security Administrations Benefits Estimator. https://www.ssa.gov/benefits/retirement/estimator.html
From there, you can enter estimated future income to arrive at an estimated correct social security benefit.
Once you have this updated social security monthly benefit amount, you need to look at your monthly expenses, and determine what impact this reduced benefit will have on your retirement plan. Accepting an early retirement offer may mean that you will be required to tap into your retirement savings, such as your 401k or IRA earlier, or it may mean delaying social security in order to receive an increased monthly benefit.
Rejecting an Early Retirement Offer
Of course, you have the option to say no to any voluntary severance package.
If you want to continue working for many years, or are unable to retire early, this may be your best option. Working additional years can lead to pay raises, promotions, increased social security and pension payments, and increased financial stability.
However, rejecting an early retirement offer has potential drawbacks too.
First, there is no guarantee that the company will repeat the early retirement offer in the future, or they may make a future offer, but with less favorable terms.
More importantly, realize that a company offering an early severance package to their employees is doing so to cut future costs. If the company’s financials do not improve, there may be much worse outcomes in the future such as layoffs, reduction in employee pay, or reduction in other benefits.
Planning for Retirement with a Voluntary Severance Package or Early Retirement Buyout Offer
As Fee-Only, Fiduciary financial planners we at Hylland Capital Management are here to help you with this important decision.
For those looking to make this decision on their own, you can still use our free financial planning software to help analyze your retirement with an early retirement offer:
For those looking for help in making this decision, contact us today: