Most early retirement offers include a severance package that is based on your annual salary and years of service at the company. For example, your employer might offer you one or two weeks’ salary (or even a month’s salary) for each year of service.

Make sure that the severance package will be enough for you to make the transition to the next phase of your life. Also, make sure that you understand the payout options available to you.

You may be able to take a lump-sum severance payment and then invest the money to provide income or use it to meet large expenses. Or, you may be able to take deferred payments over several years to spread out your income tax bill on the money.

• Can you Afford to Retire Early?
• What’s Included in the Retirement Offer?
• What are the Pros and Cons of Early Retirement?
• What Happens if you get Fired before you Retire?
• Why do Employers offer Early Retirement?

Can you Afford to Retire Early?

To decide if you should accept an early retirement offer, you can’t just look at the offer itself. You have to consider your total financial picture. Can you afford to retire early? Even if you can, will you still be able to reach all of your retirement goals? These are tough questions that a financial professional should help you sort out, but you can take some basic steps yourself.

Read Also: How Small Business Owners can Boost Their Retirement and Save on Taxes

Identify your sources of retirement income and the yearly amount you can expect from each source. Then, estimate your annual retirement expenses (don’t forget taxes and inflation) and make sure your income will be more than enough to meet them.

You may find that you can accept your employer’s offer and probably still have the retirement lifestyle you want. But remember, these are only estimates. Build in a comfortable cushion in case your expenses increase, your income drops, or you live longer than expected.

If you don’t think you can afford early retirement, it may be better not to accept your employer’s offer. The longer you stay in the workforce, the shorter your retirement will be and the less money you’ll need to fund it. Working longer may also allow you to build larger savings in your IRAs, retirement plans, and investments.

However, if you really want to retire early, making some smart choices may help you overcome the obstacles. Try to lower or eliminate some of your retirement expenses. Consider a more aggressive approach to investing. Take a part-time job for extra income. Finally, think about electing early Social Security benefits at age 62, but remember that your monthly benefit will be smaller if you do this.

What’s Included in the Retirement Offer?

While the specifics vary, the heart of an early retirement package is invariably a severance payment comprising weeks, months, or even years of wages. That sum may be sweetened by such additions as paid insurance and outplacement services to aid your transition to a new job.

Severance Payments

No laws mandate the amount of severance pay early retirees must be offered in the U.S. It’s customary, though, for employees to be offered one to two weeks of severance for every year of service to the company. The offer may be higher for executives and senior managers.

Sometimes an employer will award additional years of service in order to make the offer more lucrative and attractive. That bonus in service not only enlarges the severance payout but, if a company pension is involved, may serve to increase the eventual payments from that plan.

Several other income arrangements may form part of an offer. The most alluring might be what’s known as salary continuation. Typically offered to employees who are close to retirement age, the feature triggers continuing salary payments until that age is reached. The offer may be in addition to or in lieu of severance pay.

Some early retirement packages also include what’s known as bridging. This is an income supplement designed to bridge the gap between early retirement and eligibility for Social Security. The benefit amount is often equivalent to what the employee would receive from Social Security at age 62.

Ideally, your severance offer should also include payment for any accrued vacation or unused sick leave. However, these assets (sick pay, especially) may not be part of the offer.

Insurance Coverage

The rising cost of medical insurance has served to reduce the number of companies that offer medical coverage to their retirees. And that, in turn, has made this perk increasingly rare in early retirement packages. Where available, though, the benefit covers retired employees until they are eligible for Medicare and may offer supplemental coverage past age 65.

More common as part of early retirement packages is an offer to cover the cost of your company health insurance policy, as laid out in the Consolidated Omnibus Budget Reconciliation Act (COBRA). 

COBRA provisions allow for the temporary continuation of the coverage you had with your employer for up to 18 months, and sometimes even longer under certain circumstances. It’s rare for early retirement packages to cover the cost of premiums for that entire period, but many offer up to six months of premium payments.

Companies with more than 20 employees must offer the option of COBRA, though they are not obliged to cover any of its costs. Additionally, many states have local laws similar to COBRA. These typically apply to health insurers of employers having fewer than 20 employees and are often called mini-COBRA plans.

You can also ask if your employer can cover life insurance and disability-income insurance for that period, or at the least for one month, before offering the continuance option.

Retirement Assets

What will happen to your retirement plan, pension plan, and stock plan varies by state and by employer. Request a copy of the policies and review them—with your attorney, if you engage one for the process.

Outplacement Services

Many employers, especially large ones, offer a number of weeks or months of outplacement services as part of buyout packages. Outplacement services typically include one-on-one counseling, the ability to work in shared office spaces, and the option to join the discussion or support groups organized by the outplacement company.

Ask your employer if it’s prepared to extend the service and cover the cost of extending the service in the event you don’t find a new job after the allocated time. If you’re familiar with the various services in your area, you might also ask to choose the service yourself—although employers often contract in bulk to use a particular provider.

Smaller, or simply less generous, companies may offer post-departure job assistance that’s less involved, such as paying a service to help you write or rewrite your resume.

Other Perks

Find out if you can keep any company property you now use, such as a laptop, and have the employer acknowledge this in writing. Some other options to consider include extending your use of a leased company car or of a company-sponsored health club membership.

What are the Pros and Cons of Early Retirement?

Not everyone will have a choice in the matter, of course. Job loss, health problems, or family responsibilities can disrupt the best-laid retirement plans, forcing people out of the workforce sooner than expected.

But if you’re lucky enough to have control over when you retire, it’s worth thinking through the pros and cons before you make any decisions. Even if you can afford to retire early, you might not want to.

Pros

1. It could be good for your health

Sleeping later, getting out in the fresh air and sunshine, no more gulping meals at your desk—we can all easily imagine how leaving behind the office grind leads to healthier habits.

This isn’t just supposition. A 2002 study of British civil servants, for example, found that retiring at age 60 had no adverse effect on the subjects’ physical health overall. In fact, those with higher-level jobs saw an improvement in mental health, possibly because they were no longer subject to work-related stress (and had better pensions than lower-ranked workers).

Other studies, however, have suggested that retirement can be hazardous to your health, as we’ll get to in the next section.

2. You’ll enjoy more time to travel

Oh, the places you’ll go! Or could go, now that you’re no longer limited to the proverbial two weeks a year vacation. Plus, the earlier you retire, the more years you’ll have before health issues begin to limit your mobility.

3. It’s an opportunity to start a new career

If you dream of switching fields or starting your own business, sooner may be better than later. You’ll be a more desirable job candidate to many employers the more years you have ahead of you.

If you want to be your own boss, you’ll have more time to get your new venture off the ground. A business you launch at age 60, for example, could easily keep you intellectually challenged and out of mischief for another 20 years or more.

Cons

1. It could be bad for your health

A 2008 analysis from the National Bureau of Economic Research reported that retirement leads to declines in mental health and mobility and increases in other poor health outcomes, such as heart disease and stroke.

While that’s one argument for delaying retirement, those problems aren’t inevitable. The report also concluded that retirees who remained physically active and socially connected were less likely to suffer any ill effects.

2. Your Social Security benefits will be smaller

The sooner you start to take Social Security, the lower your benefits will be. If you were born in 1960 or later, for example, and you start taking benefits at age 62, the earliest age at which you’re eligible, your monthly benefits will be 30% less than if you wait until age 67, which Social Security refers to as your “full retirement age.”

For each year you postpone from age 67 to 70, you’ll receive an additional 8% in your monthly benefit. After age 70, there’s no further bonus for delaying.

3. Your retirement savings will have to last longer

If you retire at age 62 and live to 90, let’s say, your individual retirement accounts (IRAs) and other savings will have to cover you for 28 years. If you retire at 70 and live for the same length of time, however, your savings will only have to last for 20 years. Working longer also means you’ll have more years to contribute to a 401(k) or another retirement plan, and the money in your plan will have more time to compound.

“An easy rule of thumb to estimate your retire-ability is to multiply your expected draw on investment portfolios that will supplement Social Security and other sources by 25,” says Stephen J. Taddie, co-founder and managing partner of Stellar Capital Management, LLC, Phoenix, Ariz. “If you have that amount of money in your combined accounts, you’re ready to put a pencil to it. If you’re ‘close,’ think twice.”

And don’t assume that the livin’ will be easier, either. “One common myth is that your expenses decline in retirement,” says Jennifer E. Myers, CFP®, president of SageVest Wealth Management, McLean, Va.

4. You’ll need to find health insurance

Unless your ex-employer provides it, you’ll have to pay for health insurance on your own until you’re eligible for Medicare at age 65. If you do, be ready for sticker shock: Insurance premiums can easily be double or triple what you’re used to paying on your workplace plan—there’s no company picking up most of the tab anymore.

At the same time, unfortunately, health insurance rates climb as you get older, skyrocketing into four figures monthly as after age 55.

5. You might get bored and miss working

Many retires have a tough time making the transition from the daily routines of a full-time job to the unstructured life of retirement. They may also miss their former colleagues (sometimes even the boss) and yearn to return. Unfortunately, it isn’t easy to get back into the workforce once you’ve left it, voluntarily or otherwise.

A 2012 report by the U.S. Government Accountability Office noted that people over age 55 generally need more time to find new jobs than their younger counterparts do.

So what should you do?

If you don’t want to retire early for fear you’ll regret the decision but also don’t want to wait so long that you miss out on the pleasures of retirement, there are ways to have the best of both worlds.

One example: You might try to negotiate a reduced work schedule with your employer and enjoy the life of a retiree on your days off, an arrangement that’s often referred to as “phased retirement.” Or, if circumstances allow, see if you can work from home part of the week—that’ll give you a sense of how isolation, a more fluid schedule, and not getting out of the house/apartment suits you.

Finally, make yourself take some of those vacation days all at once, and do some of the major travelings to faraway lands you’ve always dreamed of.

What Happens if you get Fired before you Retire?

One of the new challenges facing workers in their 50s and 60s is getting laid off before they are ready to retire. A study conducted in December 2018 by researchers at ProPublica and the Urban Institute found that more than 50% of workers “experience an employer-related involuntary job separation after age 50.”

The workers laid off later in life had an extended period out of the workforce and, if they were able to find a new job, it was at a much lower income. The research also found that only 16% of the people in the study were still working at age 65.

Some may attribute this phenomenon to the prevalence of ageism in our society. Others may contend that it’s just a practical business decision for companies to save money or attract new talent. Regardless of the rationale, the repercussions for folks who are being let go from a job late in their career can be disastrous financially.

Most investors plan to contribute meaningfully to their savings as they simultaneously hit their peak earning years and no longer have the expenses that come with raising children. Dipping into one’s savings five to ten years earlier than planned, instead of continuing to save and invest, can lead to very challenging years ahead.

The best approach for this type of undoubtedly frustrating situation is to be proactive. Procrastination can further exacerbate the negative impact on one’s finances for years to come. Below is a list of planning items to consider after one is laid off late in a career:

1. File for unemployment insurance

When dealing with the shock of being laid off from a long-time employer, one of the first things to consider is filing for unemployment insurance once eligible. This may be overlooked by higher earners where unemployment checks may be quite modest compared to previous earnings. However, it will serve as an income stream to help with some basic expenses so there is no reason not to claim the money to which you are entitled.

2. Adjust your budget

If you were a prudent budgeter throughout your career, you probably have a six-month emergency fund for situations like this. That’s great, but another precautionary measure is to reassess your expenses. There are certain expenses, like mortgage payments, rent, utility bills, and groceries, that can’t be reduced.

However, canceling your next vacation, refraining from dining out, and postponing the kitchen renovation are all actions that can be taken until your financial future is more certain.

3. Assess your savings

This is a good time to take stock of what you have saved up. Set a time to meet with your financial advisor to understand the expected income from your current level of assets should you need to enter the decumulation stage of your financial life today.

Looking at cash flow projections, reassessing asset allocation, and determining if you need to make lifestyle changes are all important decisions to make in the event that you are not able to get back to the same income level.

4. Evaluate your Social Security options

The earliest age to start receiving Social Security retirement benefits is 62. At that age you can collect 75% of the monthly benefits. For folks born in 1960 or later, age 67 is when you can collect 100% of your benefits.

If you have a severance, emergency fund, or some other income sources, then waiting until full retirement age to claim benefits could be the best plan. However, if that is not a viable option, claiming now with a reduced benefit can be helpful from a cash flow perspective.

It’s important to note that while you are allowed to collect Social Security and unemployment benefits simultaneously, depending on where you live, your unemployment benefits might be reduced. If you have income coming from outside sources, it’s important to do your due diligence before claiming Social Security.

5. Get health coverage

After lost income, one of the biggest concerns for workers who lose their job is the loss of their health insurance. If you are already 65, you can enroll in Medicare. If you need any information on how to enroll and the types of plans that are offered, you can speak to a medicare consulting service. If you are younger than 65, paying for COBRA can allow you to retain your old health plan. However, individuals may be required to pay the entire premium for coverage, up to 102% of the cost of the plan. Alternatively, buying a new plan on the open market is also an option.

Be mindful that a Health Savings Account (HSA) is owned by you, not your employer. Therefore, you can continue to use it for qualified expenses even after getting laid off. This will be helpful for any medical expenses that arise while between jobs.

6. Look for low income planning opportunities

Being out of work and having a lower income may actually present excellent tax planning opportunities for investors. Some strategies to consider, after consulting your tax advisors, include converting a Traditional IRA to a Roth IRA, exercising stocks options, maximizing IRA distributions, and selling appreciated stock.

Each one of these decisions requires careful consideration of other aspects of your financial life, but being aware of potential opportunities, instead of just focusing on the obvious negatives, can lead to meaningful tax savings.

7. Rebrand yourself

Immediately applying for new jobs is an obvious decision. However, repositioning your skillset is not always top of mind. One of the reasons older employees may lose their jobs is due to an antiquated skillset. That being said, after spending several decades in a particular field, you are bound to pick up many things that the 25-year-old rookie who just replaced you does not yet possess.

This includes experience, contacts, industry knowledge, secrets of the trade, and more. Leveraging these insights can lead to a career in a different job function within the same field. 

8. Start a consulting business

Again, knowledge amassed during years of experience in your field can serve as a valuable resource to many. One of the smartest moves I have seen from laid off executives was setting up their own consulting firm.

In doing so, they stayed active in their field, prevented gaps in their resume, maintained an income stream (even if choppy), and continued to network with like-minded professionals. While the transition from a high earning C-suite employee to an entrepreneurial consultant may be difficult, the benefits sure beat spending years unsuccessfully searching for work.

9. Work longer than planned, but at a less stressful job

Changing careers may be a good opportunity to continue earning an income while reducing stress and improving your lifestyle. For example, if you worked as a corporate attorney at a large law firm, then switching to a not for profit organization will surely lower your income. You may need to work longer to reach your financial goals.

However, you’d also be trading regularly spending 70+ hours a week in the office for a significantly improved work-life balance. This strategy may have been unthinkable at your old job, but the ability to think outside the box is essential in not derailing your financial goals.

10. Accelerate your retirement plans

If downsizing or relocating were on your list of things to do in retirement, accelerating those plans may provide the cost savings you need in order to comfortably retire today. Those two items alone offer many potential savings, including reduced expenses associated with the upkeep of a larger home, taxes, commuting to work, insurance, and social pressures that may not be present in retirement.

It’s advisable to meet with your financial advisor and accountant to help run the numbers and have a conversation about the impact of such a decision. You may even leave the meeting feeling pleasantly surprised.

While losing your job later in life is difficult, it can also serve as a wakeup call to get your finances in order before entering your official retirement. Getting a handle on your budget, organizing your finances, and evaluating your insurance coverages are all excellent ways to prepare for life after work.

Furthermore, adjustments to your lifestyle by working as a consultant or in a different career can be great for mental health as you enter retirement. Although many people look forward to leaving the workforce, choosing to continue working, gradually transitioning out of corporate America to a less stressful job, helps retirees keep active, have daily structure and stay mentally sharp, while also providing some additional income in order to delay living strictly off their savings.

As people continue to live longer, there is no doubt that the trend of leaving the workforce prematurely will continue. Having a strategy in place for that possibility is the best way to preserve your finances as well as the retirement you envisioned.

Why do Employers offer Early Retirement?

When times get tough, organizations are forced to identify ways to cut costs. One way this can be done is by lowering the cost of labor. Businesses can accomplish this by offering early retirement plans to senior staff.

This might result in a loss of tacit knowledge over the long run if not managed properly. However, if handled well, this strategy can serve to cut costs in the short term.

Cost Savings

Senior management and those who have been working for an organization the longest usually make the highest salaries and have the best benefits package. As such, one senior employee may be the equivalent of three junior staff in costs.

Delay Layoffs

Employees are the most important asset for most organizations. Most businesses, therefore, prefer to delay layoffs as long as possible. An early retirement plan provides a way to delay layoffs while achieving considerable cost savings.

Employee And Customer Goodwill

As organizations continue to adopt technological advances, more jobs are being automated. This creates a need for talent with a specific skill set. Those people who do not have the required skill set may find themselves out of a job. If the company can reduce staff and costs, it can afford to retrain staff with the costs saved from early retirement programs, which can benefit the employee and customer relations.

Read Also: Should you Convert your Traditional IRA or 401(k) to a Roth IRA?

Options That Allow an Employee Early Retirement

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

1. Early retirement is an option for employees who have saved substantial financial resources aside from retirement accounts so they are unlikely to have to worry about money.
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, or elect to continue to work part-time in early retirement. This works best when the employee has developed the income stream before retiring. For example, one couple retired, moved to an island, and opened a wine bar; however, they spent several years becoming knowledgeable about wine and saving money before retiring early.
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.

Final Words

Deciding when to retire is a complex decision that isn’t just a question of dollars and cents. Your health, family obligations, and individual temperament all figure into it, or at least they should.

Perhaps most important is whether you’ve thought through what you plan to do with your retirement years, however many of them lie ahead. As the wise old saying goes, it’s important not just to retire from something but to something.