Should You Take An Early Retirement Package?
As employers try to trim payroll expenses without laying off people, many are offering older workers early retirement packages. If you are offered one of these, there are some critical questions:
Am I going to take the package? Once I take the package, how do I manage the effects of retiring early?
1. Am I going to take the package? You’ll want to think through the pros and cons.
- The first package offered is usually the most lucrative one from any given employer.
- What life insurance benefits do you have at work? Will you need to replace them, and what will it cost? Is everyone you need to insure healthy and insurable?
- If there is a good chance, you’ll lose your job anyway, you’ll get paid more with early retirement.
- Do you or your family have health conditions that will make obtaining medical coverage difficult and/or expensive?
- Can your family live on one income and/or savings while you search for new employment?
- Are you close enough to retirement that you don’t need to have another job?
- There are so many people looking for work right now. How long can you support yourselves until you HAVE to have a job?
- Can you retrain for a different kind of job that is in high demand?
- Confer with your tax preparer. Taxation of the severance package is higher because it is not earned income. Having your severance paid all at once versus as earned means it will be included in your 2020 income. This means you have the potential to be pushed into a higher tax bracket.
2. If you choose early retirement with a severance package, here are additional considerations.
- Know your numbers. What are your family’s monthly living expenses? How will that change if you are not working? Do you have special expenses such as college educations, a medically fragile child, a car that needs replacing? Factor in all of those items as well. You may need to reduce your expectations about funding college at an expensive school and rely on community colleges for at least the first 2 years to cut expenses. Also note that the severance package income will be included in your students’ FASFA calculation for two years. This may severely affect their eligibility for financial aid.
- How close are you to being eligible for Medicare? What health insurance benefits are part of your severance package? What does COBRA coverage look like for you? (To find out, talk to your company’s HR department, retirement advisor, or the COBRA department of your current health insurer.) Try to accurately estimate your health insurance costs because that may be as much a part of your budget as your mortgage.
- When will you turn 59-1/2 and have access to your retirement accounts? The IRS Rule of 55 allows and employee who is laid off, fired, or who quits a job between the ages of 55 and 59-1/2 to take money from their 401k or 403(b) plan without the 10% penalty for early withdrawal. However, many 401k plans automatically deduct 20% for Federal Taxes from distributions, regardless of whether you are in that tax bracket, unless you specifically request taxes not to be withheld. Otherwise, you would have to file your next year’s tax return to get it back. If you are 59-1/2 and can roll the 401k to an IRA, you may have more control over both investments and distributions. You also have the option to choose products that offer an income guarantee or principal guarantee on all or part of your retirement savings?
- When will you draw Social Security? If you have to draw at age 62, you may lose a lot of money making that choice.
- Given inflation and long-term care costs, how can you be sure your retirement savings will last a lifetime?
- If you need to work more before retiring, how much do you need to earn and how long do you need to work? Is this realistic?
Gwen and Sibyl can run scenarios for you and help you to make choices that improve your odds of not running out of money. You can see the cash flows and probable success rates for various strategies you might be considering. You’ll also see what rates of return are required to make your plan work, and whether those rates of return are reasonable to expect.
Schedule an appointment today at www.lifeplanfinancialadvisors.com or call for a convenient virtual or phone meeting. Feel free to share this information with anyone who will benefit from reading it.