“If you’ve been looking to make the math work on an early retirement, you just might get your wish. Drugmaker Pfizer and automaker GM recently announced buyout offers for long-time employees, and experts say this could just be the start.”
The number of job cuts due to voluntary severance, including both buyouts and early retirement offers, went as high as 46,100 in 2018, says Money in the article “This Is the Only Time You Should Accept an Early Retirement Offer.” Those numbers are up considerably from 2017, and the expectation is that more are on the way.
For people who have been at their companies for a decade or more and are over age 55, be prepared, just in case an early retirement offer comes your way, by doing a lot of analysis. There’s a key fact you need to be highly aware of: where’s your income coming from?
The idea is simple: if you are not going to be getting paid every two weeks, then how are you going to generate that income? Now that the bull market has ended, you’ll need to be aware of how market volatility may impact your numbers. Here are a few things to consider, when that offer arrives at your workspace:
How close are you to retirement age? Buyouts are tempting because they are big chunks of cash—sometimes, six months to a year and a half of pay. If you’re in your early 60s, this might be a way to exit. However, remember that your income change will have an impact on your Social Security benefit, since there will be six months to a year and a half less of income in your earnings history. If you start taking Social Security early before your Full Retirement Age, your monthly benefit could be at least 25% less in lifetime benefits, than if you waited until FRA.
Once you reach 59½, you can start taking money out of your 401(k) without the 10% early withdrawal penalty–but that’s going to reduce your nest egg.
How are you going to pay for health insurance? Buying health insurance privately is expensive, especially if your income is too high to qualify for premium subsidies under the Affordable Care Act. Find out how much you’ll have to pay for health insurance and see if you can manage that. Note that your premiums and deductibles are going to rise every year. See if you can negotiate having healthcare covered as a part of your buyout. Another option is to go on the company’s COBRA health coverage, which any company that employs more than 20 people must offer to departing employees. That’s expensive too—usually about 102% more than the cost of the plan as an employee.
How big is your nest egg? If you’re living mortgage free and have a healthy nest egg, you might be able to take the early retirement buyout. However, unless you’ve got enough to withdraw 4% of your portfolio annually, you may be in for a tough retirement ride.
Annuities are used by some people as a means of ensuring a steady stream of income. However, they are complicated, and the fees are high. Immediate fixed annuities allow you to hand over a big chunk of cash to an insurer. You then receive a check every month for either a set amount of time, or for the rest of your life. You should be cautious but explore this as an option.
Finally, do you have a second career lined up? Some buyouts give people who were planning on moving into a different career path at retirement the incentive to move forward. It can also provide them with the financial cushion to seek a job in their new career, which can sometimes take months.
Of course, the concern is that not taking a buyout may lead to a less friendly position in the future. Many workers who turn down a buyout find themselves leaving the company within about a year, often with a less generous package. It may not have been what you had in mind for the start of your retirement, but hopefully you can turn it into a positive springboard to the next stage of your life.
Reference: Money (Oct. 29, 2018) “This Is the Only Time You Should Accept an Early Retirement Offer”