Any time there’s a pullback in the economy, such as what we are currently experiencing with the effects of the COVID shutdowns, companies frequently start making early retirement offers in an effort to reduce payroll expenses. Getting an early retirement offer can come as a shock. If you find yourself in this position, here are five questions to ask before accepting an early retirement package.
1. Do You Really Have A Choice?
In many instances, especially with large companies, it’s all about headcount. Most likely, the company has a targeted number of employees they want to lay off for cash flow purposes. Since senior employees tend to have higher salaries, they are usually at the front of the queue for retirement packages.
While an early retirement package may be presented to you as a choice, companies will frequently make a second round of slightly less generous offers for those who didn’t make the “correct” choice the first time. If you decline the offer, there’s always a chance that you could be given a final offer at a later date or managed out in short order.
With this question, reading the tea leaves can be quite difficult. If you have a good relationship with your supervisor, it may be a good idea to have a conversation about the company’s priorities.
If you suspect that your position will be eliminated within a year, it may benefit you to accept the package now. While it may be hard not to take this personally, it’s simply a business decision for your company.
2. Are You Prepared For Retirement?
If you feel that you do have a choice in accepting or declining the offer, you should ask yourself if you’re ready for retirement. Ideally, you’ve already done some retirement planning in the past that will help you make an educated decision.
Will you need to apply for Social Security immediately (if you’re eligible)? Will you need to immediately tap into your retirement savings? What is your plan for paying down your debt? How about taxes? All of these questions can be answered by creating a comprehensive financial plan. If you haven’t done any financial planning, now is a good time to hire a financial planner to help you.
Another factor to consider is whether or not you are emotionally prepared to be retired. Quite often, new retirees struggle with such drastic changes to their daily routines. Many of our social connections – and even parts of our identity – are tied to our jobs. Having these parts of our lives suddenly rearranged can be quite a shock.
Also, over my career as a financial advisor in Atlanta, I’ve seen relationship dynamics change suddenly when one spouse retires. It’s a good idea to talk with your spouse so that you can understand each other’s ideas and assumptions about what retirement looks like. Are you both on the same page? This may be the most important question to ask before accepting an early retirement package!
After you’ve asked if you are financially and emotionally prepared for retirement, what will you do with your time? Is there a passion project or a “second act” that you have planned for this stage of life? Having a mission can take the stress out of starting retirement, whether it’s starting a non-profit, volunteering at the local animal shelter or taking up a new hobby.
3. What Are The Details Of The Offer?
Since most early retirement offers come with a deadline – often a very short one – it’s common to feel some pressure about making a decision quickly. Take a deep breath! Feeling under pressure can lead to poor decision making.
For that reason, it’s a good idea to shift into a detailed, left-brained way of thinking. By accessing the detail-focused, analytical part of your brain, you can slow down and make better decisions. Focusing on the specifics of the offer is a great way to do this.
The first detail to assess is the length of your severance pay. Is it reasonable given your age and seniority? Will it carry you until you turn 65 years old? Aside from paying your living expenses, age 65 is important because it’s the age where you can start Medicare.
If the severance doesn’t carry you until age 65, can you keep your health insurance through COBRA? If will need to buy individual health insurance policy (which can be surprisingly expensive if you’ve been on group insurance), that could be a factor in your decision.
Does the offer include a payout on any unused sick leave, vacation days or paid time off? If not, you may want to start calling in sick next week!
Finally, how will this affect any employee benefits that you have? Confirm with your HR department how the offer will affect your pension benefits, stock options, restricted stock, deferred compensation or other company benefit plans.
4. What Is Negotiable?
If you’ve come this far and you’re leaning toward accepting the early retirement package, it’s time to start getting creative. Often times, just as with job offers, there can be room for negotiation.
If you aren’t quite ready for retirement, you can always ask the company to help you with the expenses associated with an outplacement services company. Quite often, these services are included with most severance packages.
Will the company be willing to help pay a portion (or all) of your expenses to hire a financial advisor to help guide you through the decision-making process? Will they help offset a portion (or all) of the expenses of hiring a CPA to help you understand the tax impact of retiring? You never know until you ask.
Finally, can you come up with any reasonable, creative requests? When I was younger and caught in a corporate headcount reduction, I asked that them to pay for my last semester of my MBA program. They did – and those expenses were tax deductible for the company.
5. Do You Need Help?
Evaluating an early retirement package is no simple undertaking; your financial future is at stake. Having an experienced financial advisor assist you in the first, critical years could be the difference between a stress-free retirement and decades of worry.
If you are not working with a financial advisor (or if you are unhappy with your current advisor), click here to set up a quick, complementary introduction call to see if Prana Wealth is a good fit for you. As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. We’ve helped dozens of people with early retirement packages in the past and are ready to help you today.
These five questions to ask before accepting an early retirement package can help bring you clarity and peace of mind if you find yourself in the position where you must make this decision. Ultimately, no matter what decision you make, it will be okay. Make the best decision you can with the information you have and move on.
As Yogi Berra famously said, “When you come to a fork in the road, take it.”