Due to the coronavirus pandemic, many companies are figuring out how they can trim costs, and some are offering their employees early retirement packages. For example, Boeing has been offering both voluntary buyouts and early retirement packages to its workers.
While these packages can look tempting at first glance, you should ask yourself a few questions before signing any paperwork. The decision to accept an early retirement package is a weighty one that deserves contemplation. These packages often include several weeks’ salary and health benefits, as well as payment for accrued time off and sometimes lump sums to boot. The dollar amount can be attractive, but you need to consider several factors. Some key questions to ask include:
Where will my money come from?
Before accepting one of these packages, you’ll need to think about how you will cover your expenses if you’re not getting paychecks every couple of weeks. Figure out how much money you can safely take from 401(k) plans, individual retirement accounts (IRAs), and other accounts. While it can be tempting to live off the incentive payments, this money will eventually run out, so putting it in one of these accounts to let it grow is a more responsible decision. In general, you should only consider tapping into your retirement account when you’re at least 59 and a half, but the recent Cares Act allows for penalty-free withdrawals during the pandemic. At the same time, if you withdraw too much from these accounts now, it will be impossible for them to recover when the economy rebounds.
Will leaving my job affect my Social Security benefits?
Many retirees rely on Social Security to make ends meet. You can begin filing for Social Security at age 62, but you won’t get your full benefit until you reach the full retirement age at 66 or 67. Furthermore, delaying your benefit until you reach 70 will increase the payment even more. The payment lasts for the rest of your life with percentage-based inflation adjustments, so it makes sense to maximize the benefit.
If you leave your job now, you may end up needing to claim Social Security early, which could reduce your monthly income for the foreseeable future. People who have enough savings or a generous early retirement package may be able to wait until 70, however. Planning for Social Security is important for your financial health in retirement, so it is important to consider these ramifications.
What are the specific terms of the package?
Prior to accepting any deal, consider the actual terms of the package. Some employers make rather stingy offers compared to others, so it is worthwhile to investigate what similar companies offer and compare. Doing so will give you some leverage for negotiation. Any package is open to negotiation, so if you feel like you’re not getting a good enough deal, don’t be afraid to push for different terms. Sometimes, it makes sense to crunch some numbers and figure out how much you’ll need to carry you over until the planned retirement age. This number can then be your goal during negotiations. Remember to shoot high during any negotiations—ask for more than you want, without being totally unrealistic.
What are my options for health insurance?
One of the most pressing issues for people considering early retirement is health insurance. Many packages allow you to maintain your health insurance for a certain period after leaving, but after that, you’re often on your own until you can enroll in Medicare at age 65. People who are already 65 or older can rely on Medicare and perhaps some supplementary insurance, but anyone below that age should have a clear plan. Often, Cobra insurance kicks in once the agreed-upon period ends, but this type of insurance can quickly become very expensive, since the company contribution is limited, if it exists at all. You might rely on your spouse’s health insurance plan, but this isn’t always possible. Otherwise, the main solution is to get private insurance, which can cost a lot of money. Make sure you can afford this if another option is not available.
Why is my company offering the deal?
While the reason why your company is offering a deal for early retirement does not directly affect your personal financial health, it is still an important consideration. Under normal circumstances, companies may offer a modest package and then slowly increase it until enough employees take the deal, but the coronavirus pandemic has created a unique situation. Many companies are struggling, so they may not have the cashflow available to make great deals. The other thing that you should consider is the fact that companies do not usually make these offers unless they are in significant financial distress. Taking any deal is obviously a better option than losing your job if the company folds.