Should You Accept an Early Retirement Offer?
Companies seeking to reduce or refresh their staff frequently offer employees a package of incentives to encourage them to leave their jobs voluntarily, often before their customary retirement date.
The offers are sometimes personal, tailored to you alone. In other cases, the buyout offer is extended to the entire organization, to particular departments, or to employees who have reached a particular longevity of service.
Such an offer may elate you with the possibility of being compensated for leaving your job early. After all, a generous early retirement package might actually present an opportunity, such as using its proceeds as a springboard to seed your own business. Conversely, merely receiving the invitation may induce anxiety about your employer's apparent willingness to let you go—and about your future at the company if you decline the offer.
Once your initial emotions settle, it's time to carefully assess whether to accept, decline or perhaps negotiate the proposed offer. Don't rush the decision, as it will ultimately affect many aspects of your life. These key questions will help you through the process.
- Incentives in the offer might be negotiable, especially if you don't need or accept all of them
- Consider whether refusing the offer could lead to being laid off with a different, perhaps inferior, package
- Create or revisit a financial plan that quantifies the impact of accepting the offer on both income and expenses
What's Included in the 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.
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.
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 cost. 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.
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.
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 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.
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.
No laws require U.S. employers to pay severance to employees who are laid off
Might You Be Able to Sweeten the Deal?
Job hunters usually know they can negotiate salaries and benefits when they are hired, but may not realize the same flexibility may apply to the terms of their departure—even with an early retirement package that's presented as non-negotiable.
Exploring a more generous package may be fruitful if, for example, you don't necessarily need all components of the offer. If you're covered for healthcare under a spouse's employee policy, say, you might ask that the company's cost for providing free COBRA coverage, or at least part of it, be added to the severance payments.
You may enjoy greater bargaining leverage should your work history, especially recently, include performance feedback or incidents that could support a case for age discrimination. Companies try to avoid formal, age-based challenges to dismissals and the legal, reputational and financial damage they can cause. If your employer senses it's vulnerable to such a complaint, it may opt to sweeten the deal rather than risk a contentious and potentially costly legal battle.
How Will Your Finances Be Affected?
Once you have the best deal you think you can obtain, it's time to dig deeper into its impact on your life. Accepting an early retirement offer will almost certainly affect your financial situation in retirement or—if you plan to continue working—the years before you retire.
If you don't yet have a comprehensive financial plan for retirement, now is the time to create one. A key component of such a plan is to calculate, as best you can, the income you will require in order to cover your expenses and determine where that money might come from. Here, of course, you will need to consider what an early retirement offer might provide in light of these numbers.
Ideally, your planning should include scenarios for both accepting and declining the package, and possibly for several paths within each of those. For example, if you plan to accept the package and get another job, it might have several scenarios for how long it might take before the new job materializes.
Naturally, the plan should also consider how expenses may differ by scenario, including for health insurance, commuting, and housing.
The tax impact of the offer must also be considered. Depending upon your age, withdrawals from your retirement plan may be subject to a 10% penalty on top of regular income taxes if you are under 59½. There are potential exceptions to this for 401(k) plans and an advisor can help determine if this applies to your situation. Ideally, you can either keep the money in your current employer's plan or shift it to an IRA through a direct (trustee-to-trustee) transfer, which will not affect your taxes.
How Happy Are You in Your Job?
Your satisfaction, or dissatisfaction, at work will affect your enthusiasm for accepting a package, and perhaps the financial risk or sacrifice you're prepared to endure in order to take it.
You then need to consider that the workplace culture—and your own morale—might change after the buyouts happen. If other colleagues are being offered packages, to retire early or otherwise, some of the people and the camaraderie you've come to enjoy about your job may be lost.
Keep in mind, too, that if buyout programs do not attract as many takers as the company had expected, layoffs may follow. Workplaces in which waves of employees are being let go involuntarily are typically unhappy and stressful.
Conversely—if you feel secure in your perceived value to company—the departure of older staff, especially from management positions, may present opportunities. And those who take the package may include certain co-workers whose presence you may definitely not miss.
Might You Eventually Be Let Go Anyway?
Being extended an offer for early retirement is sometimes a signal from the company about your future there, and not necessarily an encouraging one. This is especially true if the offer was unique to you or was extended only to a small number of workers.
"In my experience, once a person is on "the list," their employer has decided they should go, and, whether now or down the road, this will generally occur," says financial advisor and author Roger Wohlner. And a future severance likely won't be as generous as the current package, Wohlner warns. "Almost without exception, in my experience, the initial early retirement package offered by a company is the most lucrative one."
Regardless of how secure you feel, try to accurately assess how strong your position may be within the company. Consider supplementing your self-assessment with opinions from work friends or colleagues you trust. Ask them for their insights into how management may perceive you. If they've also received the offer, explore how they are assessing their own security and how they see the future path of the employer.
It's sometimes useful—if a little anxiety-inducing—to ask your boss, or an HR rep who is running the program, for their own insights into the company and any future changes that might affect you.
Do You Need Professional Help With the Process?
Presented with an early retirement package, it can be helpful to have the services of a knowledgeable financial advisor. That person can assist you in assessing the financial ramifications of the package, and how well those align with your financial needs and goals. They might be especially valuable when it comes to creating and analyzing the various scenarios around accepting or rejecting the offer.
And that may not be all you need. After an initial review of the agreement, you may decide to hire a lawyer. That could be especially wise if the language in the package is too complicated or broad, or if the agreement is several pages long. Ask the lawyer which state laws, if any, govern severance agreements and if certain stipulations exist regarding timing and payment amounts. If you're part of a union, you should consult your union reps for advice and clarification.
If you subsequently decide to challenge, or even just negotiate with, the company about the package, your attorney can be your agent, which may both yield better results and reduce the stress of the negotiations.