Things to Consider When Evaluating an Early Retirement Offer
Do you often dream about that day when you no longer need to show up for work? Successful retirement outcomes often require decades of saving and planning what you could potentially do with your time, talents, and resources. But sometimes unexpected opportunities arise like an offer from your employer with special incentives to retire earlier than you originally anticipated.
Many companies provide employees with early retirement packages to encourage voluntary departures.
If you find yourself in this situation it may sound appealing. However, it is important to ask yourself the following questions before deciding if you should accept or decline an early retirement package offer:
Are You Ready to Leave Your Employer?
Before running any retirement income projections, be honest with yourself and assess the emotions that are behind your decision. If you are genuinely satisfied with your current role and your job is a core part of your identity, then a large severance offer may not be enough to prompt you to retire early unless you can do something similar at another company. You also may have a strong social network with your friends and colleagues at work. But perhaps the biggest emotional challenge is often related to how you plan to allocate your time when your job is no longer around.
It’s also important to assess the overall state of your employer’s future.
If you are concerned about the long-term viability of the business or you think your job may potentially be at risk that may be another reason to take an offer to leave early.
If you haven’t already established a clear vision of what you look forward to doing the most during retirement you need to start addressing that issue as soon as possible.
Just keep in mind that you don’t have to figure it all out at once. Many employees use an early retirement package as an opportunity to transition to another role at a different company or launch a new startup idea.
Can You Realistically Afford to Fully Retire Right Now?
Running a basic retirement income projection to see if you can afford to retire on your terms is something we should all do at least once per year. This analysis should be based on what you’ve saved so far, other investment income (rental real estate and/or self-employment), and your estimated income from Social Security and any pensions. The act of running a basic retirement calculator takes on greater meaning with an increased sense of urgency when you are faced with an early retirement decision. As a general guideline, many financial planners recommend setting an income replacement goal of 60-90 percent of your pre-retirement income to maintain the same lifestyle during your retirement years.
The problem with the use of this general rule is that retirement income needs and wants vary significantly based on your income and other factors such as your desired lifestyle. Once your planned retirement date approaches the 5- to 10-year window, you need to start seriously thinking about your future lifestyle and the income needed to fund retirement by creating a general spending plan for retirement — no matter how you choose to define this stage of life.
Create a Budget Plan for Retirement to fully assess your desired retirement income needs in today’s dollars. This can also be helpful when examining the impact of the various expenses that may change once you leave your job (health insurance premiums, travel, etc.).
How Will You Obtain Affordable Health Insurance?
It isn’t a complete shocker that health insurance is expensive while you are working and during your retirement years. The average total cost of family coverage is over $18,000 per year. But if you’ve been participating in a group health plan your employer is most likely picking up a large portion of the actual cost of health insurance. Accepting an early retirement package usually means that you will need to find affordable health care coverage until you are age 65 and eligible to participate in Medicare.
Reviewing your health insurance options will help you move forward with confidence. Here are the health insurance options for employees accepting an early retirement program incentive:
- Obtain coverage through your spouse’s employer-sponsored health plan. If your spouse is still working and eligible for health insurance coverage through an employer finding a backup insurance policy may be an easy solution. When a spouse loses health insurance coverage after taking an early retirement offer it is considered a qualifying event for the purposes of being added to an existing plan.
- Explore coverage options under the Affordable Care Act (ACA). Losing your employer-provided coverage is deemed a qualifying event for the purposes of obtaining coverage under the ACA outside of the open enrollment period. Income-based subsidies are available under the Affordable Care Act. Depending on the amount of your new household income amount after early retirement, you may qualify for a subsidy of insurance premiums. These subsidies are based on your income during the year that the policy is in effect. You can start comparing policy options in your state at HealthCare.gov.
- Use COBRA to maintain group coverage for 18 months. In some situations, employers offering an early retirement package may choose to cover the monthly COBRA premiums as part of a severance package. In this situation, COBRA will often become a more cost-effective option. However, it’s possible that less cost prohibitive coverage will be found under the ACA.
When Will You Begin Receiving Income from Social Security?
It is tempting for soon-to-be retirees to start receiving Social Security income at age 62. In fact, a report from the Center for Retirement Research suggests that nearly half of all women and over 40 percent of men start receiving Social Security benefits as early as possible. Depending on factors such as planned life expectancy and your actual retirement savings this could cost you money over the long haul.
Most workers receiving early retirement packages this year would normally be eligible to receive their full Social Security benefits at age 66 or 67. If you decide to claim your benefits early they will be reduced based on the longer payout. Choosing to delay your Social Security start date until full retirement age (or possibly as late as age 70) will increase your monthly Social Security benefits. Here are some important factors to consider while deciding when to begin receiving your Social Security.
- Will you need the extra income to make ends meet? Examining your budget plan for retirement will help answer this question. In some cases delaying Social Security isn’t an option if you absolutely need the income. However, if you can get by on less or with the help of some additional income from part-time employment you will be able to receive increased monthly benefits by delaying Social Security.
- Do you anticipate earning any income from employment or is your spouse still working? If your family earnings exceed $15,720 in 2016 you will lose $1 for every $2 you earn above the limit. But don’t worry, the benefit isn’t completely lost since there is no limit on the amount of money you may earn and still receive full Social Security amounts once you reach full retirement age.
- What is the status of your health? If you have some ongoing health concerns or other good reasons to believe that an above average longevity isn’t in your future, you may decide to begin receiving Social Security benefits early. If you are in good health, delaying will often make more sense.
- How long have immediate family members lived? If you have longevity in your family that is a valid reason to delay your beginning date for Social Security. This is especially true if someone in your immediate family has lived to their 90’s or to 100. The breakeven point is usually around age 80 if you plan to use Social Security to fund your expenses in retirement.
- What other assets are available? If you have a 401(k), pension, IRA, savings, or brokerage account to tap into you should weigh the pros and cons of doing so. In general, there is an 8 percent increase in income for every year you delay receiving Social Security. It is difficult to find any guaranteed investment.
Determining if an early retirement package makes sense for you is a personal decision that could either be a slam dunk decision or a complex mess. It all depends on how you incorporate your options into an overall financial life plan.