Many large employers are offering some of their older employees incentives to retire – perhaps earlier than the employees had planned. If you get an offer from your employer, let us offer some ideas that will lead you to the right decision.
Look at the numbers
The first step toward deciding whether to take an early retirement offer is to see if your current assets can support your lifestyle for your life expectancy. If you are living off of $7000 per month now, that would be your retirement goal. It is that simple. We would use conservative projections, stress test the numbers to the point of being paranoid just to be safe, and use generous life expectancies to be sure that you have enough money from which to draw.
You should then discuss the financial advantage of taking the buyout. Do you plan to still work? Can you obtain another job? Many of our clients choose to work at a less lucrative job with less hours to fill the gap and gradually work toward retirement. Others just want to stop working.
Employers offering early retirement will often include several inducements for the target employees to leave, starting with a severance payment that could equal several weeks or months of pay. The bad news is that severance payments are usually subject to income and payroll taxes.
Another valuable incentive is when the employer offers health insurance. Will they offer this until you are age 65 and Medicare eligible? The health insurance through the company is likely to be lower cost to you than if you were to obtain it on your own, and also you will be able to get coverage regardless of your health condition. To be safe, you may want to figure the cost of health insurance to take you to Medicare. Although the costs vary, you can estimate around $500 per month per person if you are around age 55. Add a few hundred dollars per month for the extras.
Just because you accept an early retirement offer doesn’t mean you have to stop working. You could ask your current employer if there is an opportunity to continue working for them in an as-needed or consultant role. You can look at getting a similar position with another employer, which would offer not only a steady paycheck, but hopefully some benefits that you will leave behind at your former employer. Some of our clients choose to become self-employed as an expert in their current field and know that there is a demand for their services.
Replace your paycheck
Our job is to look at all of your resources and help you develop a specific strategy for replacing your lost paycheck. Any pensions or severance payments are a welcome start, and additional income may have to come from pretax retirement plans, such as 401(k) and IRA accounts. Normally, owners of pretax 401(k)s who are over 55 and have left their jobs can withdraw money from those accounts with no 10% penalty for pulling the money out before turning 59 ½. The distributions will be taxable as ordinary income.
Some general rules of thumb when withdrawing money from an IRA or 401(k): Try to hold off taking any money out until 2021 so that the withdrawn amounts aren’t added on to your earned income for 2020. Second, if possible, try to only withdraw only enough from these accounts annually until your taxable income reaches the top of the 12% tax bracket. (For 2020, $40,126 for singles, $80,250 for married filing jointly). Ideally, any income needed above these amounts can be taken from investments and savings held in taxable accounts.
Special Pandemic Rules
Prior to the Pandemic, our clients under 59 ½ could avoid the 10% penalty on early withdrawals from their IRA accounts for specific and unique circumstances, or use the 72(t) rule. The CARES Act allows certain IRA/401(k) owners who have been affected by the virus (medically or financially) to withdraw up to $100,000 from their accounts in 2020 with no 10% penalty, even if they are under 59 ½. The withdrawals are still taxable, but the withdrawn amount can be spread out over three year of tax returns and can be repaid to the account over that time to avoid the taxation.
Turn down the offer?
Anyone considering taking an early retirement offer should think about the consequences of turning it down. Do you need the paycheck? Do you have enough saved? There is a great value to continue to get the paycheck and benefits that you rely on. On the other hand, how healthy is your employer that is needing to make this offer? Will you be able to keep your job for the next few years? Both sides should be weighed before making this important decision.