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Before You Accept Early Retirement, Are You Ready?


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Presenting voluntary early retirement offers to employees is a strategy long used by companies seeking to pare their costs by trimming their payrolls.

[ibd-display-video id=3037819 width=50 float=left autostart=true] Around the country, such packages often include one-time, upfront cash payments and continuing health care coverage in exchange for workers leaving the company.

For example, Humana's offer to some long-tenured employees aged 55 and older included a severance package equal to two weeks of retirement pay for each year of service, capped at 52 weeks' pay.

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Sure sounds sweet. But is it wise, as more people elect to stay in the workforce beyond the traditional retirement age as the cost of living continues to rise?

"People are not grabbing (early retirement packages) as quickly as they have in the past," said Mark Kluger, managing partner at New Jersey law firm Kluger Henley. "We still have plenty of people recovering from the stock market crash who lost a tremendous amount of their retirement savings."

Now that they're back in workforce, Kluger said, "those people are obviously not going to go back out so quickly."

When deciding whether to accept early retirement incentives or remain at your job, first take a hard look at your company and its financial strengths.

Should your employer's financial performance appear to be "sinking in a way that will lead to layoffs, the (early retirement) package is probably the best deal you're going to get," according to research group Consumer Reports.

If your company appears to be relatively stable, consider sticking around, the publication said, since remaining means you'll continue to draw a paycheck and get more time to bulk up your retirement savings.

People must also have a firm understanding of their post-retirement expenses, which can be heavily influenced by heavy health care costs, said Leslie Thompson, managing principal at Spectrum Management Group.

Check whether your health benefits would continue if you accept the early-out offer, for what length of time you'd have those benefits and at what the cost would be for you. For example, Thompson said, one 60-year-old early retiree client watched the annual cost of family health coverage jump to $32,000. In contrast, workers with employee-sponsored health coverage pay $5,714 on average toward their premiums, according to the Kaiser Family Foundation/Health Research & Education Trust 2017 Employer Health Benefits Survey .

"Large companies have really great benefits. So, if you're offered early retirement, you need to really understand how that's going to impact your benefits and how is that going to impact your overall plan," Thompson said.

Keep in mind that after you leave your company, you'll also lose the ability to participate in or get employer matching contributions to your 401(k) plan. And the impact of retiring early will show up in your future Social Security payout projections, calculations that are based on people continuing to work until age 65.

Should someone stop working before that age, "long-term, it will diminish what you thought you were going to get from Social Security benefits. I don't think people really think about that," said Thompson.

Taking the offer but going back to work or becoming an entrepreneur is also an attractive approach for some early retirees. Scour the fine print of an early retirement offer to see if the plan includes any noncompete clauses that could restrict the retiree's ability to work for a competitor or solicit former customers or employees of the business, Kluger recommends.

Early retiree-wannabes should consider tax implications  if they accept an early-out offer. Employer-sponsored retirement plans such as 401(k)s and traditional IRAs are generally subject to a 10% premature distribution penalty for withdrawals made before age 59-1/2. There are age-based exceptions to the rule that won't trigger an early-withdrawal penalty.

Consider that a worker who takes an early retirement package doesn't have to draw Social Security early, too. "You may be inadvertently hurting your financial security by doing this," according to The Balance , a personal finance website. Married couples who coordinate can collect more in combined benefits under Social Security rules.

And think about what you'll do in retirement. Former Texas air traffic controller Jonathan Look took voluntary early retirement at 50, after being in the industry for 25 years. He sold everything he owned and moved to a small beach town in Mexico in 2011.

These days, Look - now 56 and living in Portugal - does freelance travel writing and photography. "I do it more as a hobby," Look said. "I wanted to do other things in life."

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Stocks


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