How to evaluate an early retirement offer

Consider your personal and financial needs before accepting an early retirement package.

  • By Rachel Hartman,
  • U.S. News & World Report
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During economic downturns, some companies offer early retirement packages to reduce their number of paid employees. If your employer asks you to consider stepping away now, the decision is not one to make lightly. “Although you might be tempted to accept such a package, at the same time, you might be reluctant to leave a job you have always loved and stayed at for many years,” says Steven Mitchell Sack, an attorney and owner of the Law Offices of Steven Mitchell Sack in New York.

The path to retirement bliss

Research shows retirees are more fulfilled when they stay engaged.

When considering an early retirement package you’ll want to think about:

  • The specifics of what’s included in the package.
  • The consequences of not accepting the offer.
  • The possibility of finding another job.
  • Your overall savings.
  • Your age and Social Security benefits.
  • Health insurance needs.

Use the following criteria to weigh the pros and cons of an early retirement offer.

Break down the details of the package

Early retirement offers can vary, depending on the company, the number of years you have worked there as an employee and the organization’s financial position. Start by checking if severance pay is included. This is usually an amount that is based on your work history. Employers will often offer one or two weeks’ worth of pay for every year of employment.

For instance, perhaps you earned an average of $1,000 a week for 20 years at a company. The early retirement offer might include severance pay of $20,000. “Sometimes companies will offer credit for extra years to sweeten the offer,” says Kimberly Foss, a certified financial planner and president of Empyrion Wealth Management in Roseville, California.

Consider your health insurance needs

If you are 65 or older, you are probably eligible for Medicare. If you are younger than 65, you’ll want to find out if health insurance benefits are part of the retirement package. “Though less common these days, some employers allow retired employees to remain on the group plan for a certain period of time,” Foss says. If that option is not available, you’ll want to consider what you will do for health insurance. Perhaps your spouse has a plan that will cover you. If you need to purchase health insurance yourself, look at the costs associated with this option.

Think about the possibility of finding another job

If you’re interested in looking for another job, you’ll want to consider the likelihood of finding one. For instance, if other companies in your industry are laying off workers or downsizing, it may be difficult to find work in your specific field. However, if you’re interested in working in an industry that is currently hiring workers or want to start your own business in a growing market, the early retirement offer could be a way to transition into the new area.

Some early retirement packages may include counseling sessions with a job agency to help you look for another place to work. Other offers might cover the cost of meeting with a wealth advisor to look over your financial situation and plan next steps. An early retirement offer could even provide legal services, such as meeting with an attorney to create a will or establish a trust.

Understand the consequences of not accepting the offer

Companies trying to reduce their labor force may be in a difficult financial situation. In this case, turning down an offer now could lead to a future dismissal with fewer benefits. At the same time, it’s important to evaluate other possibilities. “If you are not ready to retire yet, work out something with your employer for you to stay on with the company a little longer,” Sack says.

If you’ve spent many years with the company or in the related industry, you might suggest working part-time as a consultant for a period before retiring. You could check if staying on the job for several months or a year is an option. “Offer to train your replacement while you are still employed,” Sack says.

Factor in Social Security benefits

Social Security benefits are available starting at age 62. Younger retirees typically won’t be eligible for Social Security benefits. If you are able to start receiving Social Security payments, it’s worthwhile to consider the implications of doing so. Taking benefits before you reach your full retirement age will reduce the monthly payments you receive. For example, if you sign up for Social Security at age 62 and your full retirement age is 66, you can expect to receive a 25% lower monthly benefit compared to waiting until you turn 66 to start collecting payments.

Look at your financial situation

Consider how an early retirement would affect your retirement finances. “Take some time to sit down with someone, preferably a financial advisor who has your best interest at heart,” says Lynell Ross, a certified health and wellness coach and founder of Zivadream in Auburn, California. Go over your overall savings, along with expected income streams, such as money from a rental property, pension or other investments. Then look at the expenses you will have during retirement to see if you’ll be able to retire comfortably now. “If you think your money may not last, you may want to stay on working for a few more years, saving everything you can,” Ross says.

Think about your well-being

Think about the lifestyle you will have if you retire now. If you have a health condition that would make working longer difficult or have a loved one who is ill, you may opt for the early retirement package so you can focus on these areas. The same is true if you are ready to take a break from working or want to pursue other interests, like travel.

If you want to take the early retirement offer and shift to a different lifestyle, but don’t have the financial resources to do so, look at ways to reduce expenses. You might downsize your home or move to a region with lower living costs. “If you want to retire and can find a practical way to make it happen, you can finally enjoy things you haven’t been able to while maintaining a higher qualify of life,” Ross says.

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