The ripple effects – or should we say, the tidal wave – of economic changes caused by the coronavirus pandemic continue to roil the U.S. economy. Even as companies slowly get their people back to work, many are realizing that things will never again be the same as they were as recently as five short months ago. As a result of the protracted recovery, some larger firms are offering older employees tempting incentives to retire early, and if you’ve received one of those offers, you may be wrestling with the decision concerning how to respond. Perhaps this six-part quiz from Money magazine might prove helpful.
Companies Offer Early Retirement to Shrink Their Workforce
In the Money article, reporter Martha White writes, “Airlines are trying to convince thousands of their workers to take early-retirement buyouts as they search for ways to cut costs in the face of still-weak demand. What’s more, the pandemic-induced recession is likely to lead to a larger wave of voluntary separation — i.e., buyout and early retirement— offerings from employers. If you’re over 55, have been with your employer for more than a decade and/or if you’re one of your company’s top earners, you might be facing a buyout offer in the near future.”
White spoke with financial advisors across the U.S. who report “a wave of clients” coming to their appointments with severance offers in hand, wondering what to do. “Whether or not an early retirement buyout is the best financial choice for you depends on your current and future spending, your living expenses, as well as big-ticket obligations like a child’s college education,” the article says. “It also depends on how close you are to retirement and how easy you think it will be to find a new job — or even if a new job is in the cards at all.”
When It Comes to Early Retirement, Do You Have a Choice?
Some workers being offered an early retirement buyout don’t really have the option of saying no. If that’s your situation, then you have a different thought process to go through. On the other hand, however, your company might permit you to reject early retirement and bank on your employer’s resilience during the coming uncertain recovery. “Of course,” Money warns, “turning down an early-retirement offer is no guarantee you’ll keep your job, either. The unpredictable nature of COVID-19 — and some public health officials’ concerns about a potential resurgence of the disease — might make your job less secure than it was six months ago.”
But if you do have the option of accepting or rejecting an early retirement buy-out, your answer to these six questions might help you to, as the article says, “kickstart your retirement.” Here’s an abbreviated look at Money’s self-quiz.
Early Retirement: Are You Willing to Haggle?
“No two voluntary separation offers are alike,” advisors told reporter Martha White. Extensive packages include a host of ancillary benefits, while the weakest buyouts may not even include access to health care. “This means you need to read the fine print, but it also means you have room to negotiate more favorable terms,” Money advises.
These might include an extension of health care benefits or a distribution of your buyout over time to reduce the tax bite. “All of the financial planners Money spoke to emphasized that everything from the amount you’re offered to what (if any) benefits are included is negotiable,” says the article. “Remember, you might be getting a big chunk of cash, but your employer is also getting something out of this exchange by freeing themselves of your compensation costs.”
Early Retirement: Can You Afford to Stop Working?
Ideally, the buyout you receive will “bridge the gap between now and when you want to be able to retire,” one investment strategist said. If you’re able to find work elsewhere after receiving your buy-out, you’ll be in good shape, so long as you’re not trapped by a non-compete that you might have signed when you took your current job. (If you are under a non-compete clause, Money advises that you might be able to negotiate having it waived as part of your package.)
But what if you can’t land another job? “Many people taking buyouts don’t think of them as an express lane to retirement, but in this economy, you should prepare for that possibility,” Money warns. “Depending on your industry and your age, it might be tougher than you expect to jump back into the ranks of the employed.” You’ll have to look squarely at the worst-case scenario – that you’ll never return to work – and plan accordingly.
Early Retirement: Have You Planned for Your Financial Future?
“If you get a lump-sum buyout offer” – which Money says is the most common option today – you need a solid financial strategy. “Develop a detailed plan for what you’re going to do with that money before you have it in hand,” says the article. We won’t go into detail here, but you’ll need to consider all sources of income and every aspect of your spending, saving, and investing. At AgingOptions we highly recommend you meet with an objective financial planner and prepare a financial dashboard to guide all your decisions about money. Contact us and we’ll refer you to someone who can assist you.
Early Retirement: Do You Have a Comfortable Cash Cushion?
“While six months’ worth of expenses might be a good emergency savings cushion for workers, the math changes if you’re no longer earning a paycheck,” Money says. “What’s more, recent market volatility means you’ll want a bigger buffer to avoid having to sell assets if stocks are tanking.” In this current market climate, one advisor told Martha White that she recommends that families keep three years’ worth of expenses in cash.
Early Retirement: Are You Ready for the Tax Hit?
“A lump-sum buyout that doubles or triples your income for the year is likely going to mean a big bump in your tax bill, so factor that into your budget,” the article warns. This is where negotiating can help. You might be able to get your employer to put some of your buyout money into a tax-deferred account like a 401(k) or a Health Savings Account (HSA). Or the company may be willing to spread out the payment over several years.
There’s risk in this second option, however: if the company collapses before you get paid, your money will probably disappear since buyouts aren’t protected like pension funds.
Early Retirement: Do You Have Access to Affordable Health Insurance?
“For many people, health insurance will be the single most important deciding factor when weighing their voluntary separation options,” the Money article concludes. The company may offer you continued health coverage for a specified period, often one year, after which you’ll be eligible for COBRA benefits for up to 18 more months (but beware of a huge boost in premiums if you go the COBRA route).
“If this still doesn’t bring you to 65, the age at which you can get health coverage through Medicare, you’re going to need a plan for health insurance,” says Money. If your spouse has coverage, adding yourself to the policy should be a good bet. Otherwise check out your state’s healthcare exchange under the Affordable Care Act. “You’ll want to do some research to figure out how much you have to allocate per year until you hit Medicare eligibility.”
Two Important Retirement-Planning Announcements from AgingOptions
At AgingOptions our chief desire is to help you prepare for the kind of retirement you’ve always dreamed of having. Toward that end, we want to share two important announcements that are designed to facilitate your LifePlanning process even during this period when most of us are required to avoid gathering in groups.
First, Rajiv Nagaich has scheduled several of his popular, free LifePlanning Seminars in the form of webinars that you can watch conveniently at home. Simply visit our Events Page and register for the webinar of your choice.
Our second announcement: in cooperation with our partners at LifePoint Law, we are excited to launch a ground-breaking new service called the LifePoint Law Emergency Legal Kit. Without leaving your home, you can now consult with a LifePoint Law attorney who will work with you to prepare and sign a complete set of vitally important legal documents including both Financial and Healthcare Powers of Attorney, a Living Will/Advance Directive, a Will or Trust, and much more. Click on the link or call us at AgingOptions and we’ll explain this excellent service to you.
Reliable information has never been more important – and that’s our promise to you at AgingOptions and LifePoint Law. Age on!
(originally reported at www.money.com)