When your company comes to you with a severance package to negotiate retiring early, one of your first calls should be to your financial adviser. While many early retirement offers seem attractive at first, you must review it carefully to ensure that it works in concert with your financial plan before accepting.
Companies offer early retirement packages for several reasons. It could be that the job or department is changing and providing an early retirement package is better than firing loyal employees, or it could be that the company is phasing out a defined benefit pension in favor of a defined contribution plan, like a 401(k). Either way, if you are offered an early retirement package, there are several considerations to take into account before accepting.
Most importantly is your health care option. Seniors are eligible for Medicare at 65, so any retirement package prior to age 65 should account for the needed health coverage. If health insurance is not addressed, your options are limited. You may be able to change to your spouse’s employer-provided coverage; you can pay to remain on your employer’s group coverage through the Consolidated Omnibus Budget Reconciliation Act (COBRA); or you may be able to find an individual policy on the Healthcare Marketplace. These options all come with a significant cost compared to what you had while employed. This can quickly eat into any income provided by your severance package. If it is not addressed, you may want to negotiate that your severance package provides medical coverage until you reach age 65.
If you are younger than age 62 — the earliest you can collect Social Security benefits — you’ll want to run projections with your financial adviser to determine if the amount offered in the severance package is enough to maintain your living expenses until you are eligible for benefits. While you may be old enough to withdraw from your retirement accounts without early withdrawal penalties, tapping your retirement accounts several years earlier than anticipated will greatly affect how long your assets will last.
It is also easy to be fooled by your 401(k) balance. Your balance may be a million dollars, but withdrawals are taxed at ordinary income rates, so your million-dollar retirement nest egg could be closer to $760,000. Furthermore, you may miss out on several years of contributions to your retirement accounts during years when you should be able to save the most. In your late 50s, you are likely at the peak earning point in your career so missing out on saving 10 percent of your salary to your 401(k) plus matching contributions over several years will likely have a meaningful impact to your financial plan.
If you find that the early retirement offer — while generous — won’t work with your financial plan, you should closely look at the severance package for any non-compete stipulations that would prevent you from taking your skills to a competitor. Understanding any non-compete agreements early will help you determine your next steps. Your experience and skills may be useful to another employer in your industry or as a consultant. You may end up being fortunate enough to land another job and be able to save the severance package for when you actually choose to retire.