So, You’ve Been Offered Early Retirement…
Many people have not only found themselves working from home in recent months, but they’ve been wondering when they will get back in the office. Others have received the offer of never having to return to the office. Perhaps your company has given you such an offer of “early retirement” and you’re wondering whether or not you should take it.
The COVID-19 pandemic has created a unique circumstance where companies are trying to limit their long-term cash outflows with a short-term cash outlay. However, what may be best for the company’s cash flow may not be best for yours and you need a framework in which to evaluate this offer. Here are some primary considerations to utilize in making this decision:
1 – Do you want to retire?
This is a rather simple consideration but perhaps the most important. If you are not ready to retire then this makes the decision rather easy. Often I am engaged by my friends to help them make decisions and they are caught off-guard by this question. Even if the numbers make sense, the numbers are not all that matter. We want our life to be what we make of it, and with planning we should be able to retire when we are good and ready.
2 – Is the amount of money offered enough?
The amount of cash offered is certainly a major factor, particularly if it is what you will be living on for the foreseeable future. Perhaps this isn’t early retirement but it is evaluating a pension offer of either the lump sum payment vs. lifetime payments. It’s fairly easy to evaluate present cash value vs. the value of all future payments. (Lottery winners also have to solve this issue.)
Outside of impact to personal tax circumstances, the real question becomes: Is this amount of money going to last? This is where your budget comes in handy because it will help you know how long your necessary expenses will be covered in addition to how much discretionary spending we will have. In taking the early retirement, if you’re beginning to draw on your retirement accounts sooner than anticipated, we have to evaluate how our spending is going to affect this. The longevity of your accounts will certainly be tested if you begin to spend them sooner than originally planned.
3 – What else is included in your offer for early retirement?
We are not simply looking to replace income for a certain period of time because you are no longer receiving income from your employer. Items to consider outside of salary replacement are health insurance, life insurance, and other fringe benefits unique to the employment offer (such as discounts on cell phone service, gym membership, etc.).
If you are not old enough to qualify for Medicare you are either going to enroll in COBRA, seek healthcare coverage from another employer (i.e. a new job), or go to the marketplace. Both COBRA and the marketplace will likely significantly increase your monthly expenses for health premiums. This is probably the single greatest increase of necessary expenses in one’s budget once they retire.
4 – What is the impact upon your Social Security benefit and filing?
You may be on track to take your benefits as planned or this may accelerate your filing. In either case your benefit may also end up smaller than anticipated due to either an early filing (prior to FRA) or because you are no longer earning credits. When planning your retirement, we cannot overlook the role Social Security will play in it. There are obvious concerns with the system that need to be addressed, but we can only work with the information given.
5 – Do you want to take the early retirement and transition into another career?
I take the perspective that this is an excellent opportunity to take a short vacation, appropriately payoff some debts, and save as much as possible while making either a career or job change. Receiving a severance and then working part-time or full-time elsewhere simply improves your financial circumstances.
As I always say, “the best way to improve our financial plan is to save more, spend less, and retire later.” There are not many circumstances that allow you do enact all three of these strategies at once, quite like this. Without question it should at least be a consideration when presented with an early retirement or severance offer.
Now that you’re sufficiently equipped for framing your decision as you evaluate your early retirement, don’t forget to keep us in the loop. Your financial plan will thank you later!
JT Trimble, Candidate for CFP® certification, joined YHB in August of 2018 and serves as a Client Account Manager. He is a regular contributor to Let’s Talk Investing and speaker at numerous events throughout the region. JT is a member of the Loudoun County Chamber of Commerce and the Financial Planning Association.