Early Retirement Is an Option for Some Employees

What If Your Employer Offers Early Retirement Incentives?

Middle agedman and woman fly a colorful kite on a beach
Early Retirement Allows People to Enjoy Activities that Might Be Tougher in Later Years. Ronnie Kaufman/Larry Hirshowitz/Blend Images/Getty Images

Early retirement occurs when an employee decides to retire (leave work) before the age at which he or she becomes eligible to collect retirement resources such as Social Security, a company pension, or distributions from a 401(k) or another retirement plan.

Options for Early Retirement

Many scenarios exist that would allow an employee to retire early. These are some of the potential scenarios:

1. An early retirement is an option for employees who have saved substantial financial resources aside from retirement accounts.

2. Early retirement is also an option for employees who have developed multiple income streams. For example, an employee who works full time, but pursues website development, freelance writing, or photography as a second income, may develop the part-time business into a full-time career.

This works best when the employee has developed the income stream before retiring. Just recently I read about a couple who retired, moved to an island, and opened a wine bar. They had spent several years becoming knowledgeable about wine and saving money before retiring.

3. The employee decides that early retirement is possible because of a combination of substantial savings as well as a second income stream.

4. In additional cases when an employee chooses early retirement, the employee makes the choice and knows that he or she must continue to work. Often, they are burned out in their current field and their saved resources allow them the option of working part-time or with a more flexible schedule.

Sometimes early retirees continue to work for their current employer but part-time and for part of the year. Depending on their field, this changed relationship can be an option. Other early retirees decide to pursue a job in a field that is different from their full-time career. As an example, a friend who worked for years in higher education and education promotion, in early retirement is working at her church as an administrator part-time.

Employer Incentivized Early Retirement

Early retirement is also an offer made by employers who seek to cut costs and encourage highly paid employees to leave their employment by retiring early. Usually, the early retirement option is accompanied by financial incentives.

Sometimes the employer wants to make room for younger employees with fresh ideas. The employer may want to promote employees so they gain experience in management or in lateral move jobs. But whatever the employer's reasons, whether financial targets, attrition needs or new employees, the early retirement offers must help them meet the targets they set.

The employer reaches its financial targets, when the correct number of employees needed for streamlining the organization and cutting costs, accept the early retirement offer. And employees who are offered early retirement need to carefully evaluate the employer's early retirement incentives in combination with their own savings and realistic additional income expectations and opportunities.

Rarely will the early retirement offer completely fund retirement. Additional options, such as paid college tuition, often accompany early retirement offers, and must also be evaluated in the total equation.

In either case, early retirement offers must be evaluated with the knowledge that if the employer fails to reach its intended workforce reduction targets, layoffs might result. Early retirement offers from employers are fraught with options that the potential retirees must consider with the understanding that they could lose the incentives and their job anyway if they choose not to accept the employer's more generous offer.

And in a layoff, an employee will generally receive a severance package, but early retirement incentives will not be offered or available.

Employees who are offered early retirement incentive packages should talk with a financial consultant to determine their best and reasonable options and alternatives. They should also keep track of the number of employees who are choosing to take the employer's offer to best understand the potential scenarios that might await them.

It's tough to refuse the incentive and find yourself laid off anyway—without the incentives offered earlier.