Company-sponsored early retirement programs can be very attractive. These early retirement programs can offer the chance to make a career change, to spend more time as a volunteer in the community, to go back to school, or to spend more time with the family. Before deciding to accept early retirement, however, think about the rest of one's life and then decide if early retirement is the best option. This will assist in systematically analyzing the available options.
Reasons for the separation
Decide if the incentive is indeed voluntary or a means of arbitrary age discrimination. If the ?voluntary? incentives are combined with the threat of imminent layoffs, subtle coercion, or short windows of eligibility, it may lead older workers to conclude that they have little choice but to accept the package. Employment rights are protected by the Federal Age Discrimination in Employment Act of 1967 (ADEA). You might want to research job opportunities that are offered to younger employees. The same options available in these positions must also be offered to older employees.
Try to get an honest assessment of a person's future with the company should he/she elect not to participate. Why is this plan being offered? Are other employees talking about the desirability or lack of desirability of retaining older workers in the company? Who is the source of these statements? What is the current financial status of the employer? What is his/her position within the organization and how valuable is the position? Talk with others going through the process to ascertain the similarity of conditions.
Assuming that it has been determined that you do in fact have a choice in this matter, other issues with regard to psychological and non-financial concerns regarding continued employment with the company become important. Here are the questions to ask yourself:
Review the offer carefully
- What do you think about "retiring" soon
- Would it be possible to negotiate a better offer
- Will you continue to work if you accept the offer
- How long would it take to find another position
- Can you consult with the company on an independent basis
- How much planning has been done for retirement
- Have you talked with other "early retirees"
The employer should furnish enough information about the offering to enable you to make a decision. It needs to be presented in writing, in clear and understandable terms, and include relevant pension and benefits information. The window, or length of time in which you must make a decision should provide adequate time to research and completely think through the decision. If not, talk with the employer about receiving additional time. Submit a request for additional evaluation time in writing.
Evaluate financial sufficiency
Determine if there is enough money to retire early. Severance pay needs to be identified - how much and for how long. Decide if it is to your advantage to take it as a lump sum or as a continuation of salary. The continuation of salary may prolong the continuation of benefits. On the other hand, a lump sum provides protection from a failing company. Will there be bridge payments until Social Security payments begin? If cash bonuses are due, check to see if it would be beneficial to your tax situation to take them in the following year.
Audit your social security account
Secure information on your Social Security Benefits and determine the portion receivable immediately. Calculate unemployment insurance benefit amounts and verify the accuracy of the data Social Security has on its records. Review how early retirement would reduce benefits. Complete Form SSA-7004, ?Request for Statement of Earnings?. To order this form, call 800 937 2000.
Review current benefits
Contact the benefits office or pension plan administrator to request an individual benefits statement. This statement will tell what the monthly pension benefit would be if you were to accept the retirement incentive. How many years are added to your age or service with a defined-benefit plan under the severance package? The statement needs to enable the comparison of this monthly figure with what the pension benefit would be at normal retirement age.
Each retirement plan or program should be evaluated separately and summarized based on various assumptions of salary increases, investment returns, and employer contributions. Consult the summary plan description (SPD) or pension plan administrator. Obtain the specifics of the company retirement plan. What distribution options available? Will the pension benefits continue for your spouse if he/she should die first? Will the monthly pension benefit be integrated with Social Security benefits?
What benefits would be continued?
Determine what other company benefits will remain in place based on the Early Retirement offer. Medical insurance is critical - will it continue? Might it continue until age 65 or eligibility for Medicare? What will the cost be? Under COBRA, all employees have the right to buy coverage for a limited period of time. Compare this cost with a policy on the open market. Be sure to consider any pre-existing conditions.
Review life and disability insurance needs. It is likely that coverage will end with employment. On the other hand, if life insurance is continued until age 65, at what point does it end, and how does it decrease? Some policies are convertible and can be paid for privately. Compare these costs with individual policies.
Negotiate other perks
There are many opportunities that might be helpful: outplacement services, purchase of a company car, office/typing support, accelerated vesting in a retirement plan, extensions of the amount of time to exercise stock options, the company hiring you as a consultant, additional paid vacation days, unused sick days, and unused personal days. Once all of the facts have been compiled, a financial advisor needs to help sort them into a usable format.
Your final evaluation
In summary, some important financial and non-financial considerations are:
- Income provided compared to the projected net expenses
- Proper asset allocation of investments to produce growth (to offset inflation risk and income needs)
- The age and prospects for other employment
- Income tax implications
- Spouse's employment status
- Employer vulnerability to merger, bankruptcy or takeover
- Health status of both spouses
- Attitude of the employee
- Motivation for retiring
- Emotional adjustment
- Relocation to another area
Recognizing the advantages and disadvantages of the early retirement program as it applies to your specific objectives is of major value. An advisor can assist in revising your personal financial plan to incorporate the financial impact of the acceptance or rejection of the offer.