When companies are finding themselves in the need of cutting more costs, the majority of them would prefer to reduce payroll expenses by offering some of their employees’ early retirement packages, which are also known as voluntary separation or severance packages.
Companies usually offer these solutions to senior management or employees who have been working for the longest time in the company.
What does it mean if you receive an offer with an early retirement package?
Faced with rising costs and probably even lower revenues, companies might want to opt for this route rather than laying off long-term staff, in order to maintain employee and customer goodwill.
Some of the other reasons why companies might offer early retirement packages might be the need to eliminate redundant jobs post-merger or positions that are now automated, or even restructuring the workforce for strategic or operational efficiency reasons.
Even if these offers are considered to be voluntary, which basically means that the employee doesn’t have to accept these offers (perhaps thinking that something better might come along later), still the offer should be taken into consideration.
After all, if they come to you with one of these offers, should you accept it? Here are some of the key things you should know before making the best possible choice for yourself.
What’s the typical early retirement package?
There are so many variations of early retirement packages, that what your company will offer you depends on many different factors, such as the financial health of your organization and even historical precedence. Even so, a package might include:
- Cash payment – the amount is usually based on how long you have worked for the company. You could also be offered a week, two weeks, or even a month of pay for every year of service. The payout is usually a lump sum, but it can be eventually paid out over the course of the years.
- Payments for accrued vacation or sick time.
- Benefits that included health and dental options for a while after separation, through employer-funded COBRA or other similar means. One of the most lucrative packages might continue to provide medical coverage until you reach 65 years old – which is the age of Medicare eligibility.
- Even more, in some stances, employers might also provide an early retirement offer that could include a social security bridge payment. The payments are temporary, and they’re meant to “bridge” you to what you could receive from Social Security when you reach 62 years old.
- Other perks like life insurance, accelerated retirement or even pension benefits, stock or even stock options
- An amount of money that is meant to be used for continuing your education or professional training
- Outplacement, coaching, or even support to help you transition to another company, consulting, or even another career
- Financial planning services
These packages might be substantially different from employer to employer, so it depends entirely on various factors.
Your offer can even be contingent on other concessions, such as signing a non-compete or non-disclosure agreement, but also giving up on some of your unvested retirement benefits.
When you should consider saying “yes” to an early retirement offer
Whether you accept or not depends on many circumstances, not only your personal financial situation but also the company’s situation.
What’s your company’s motivation?
“Early retirement might not fit in with the plans you made. But let’s face it, after all, your employer has decided that they actually need you to leave” according to Ell. “Staying might put you in jeopardy, and you might get laid off without compensation or even worse, fired.”
You need to think about why is your company doing this. Because if you need to work, you should think carefully about what this kind of action might suggest about the future of the company or even the market.
If COVID-19 made just a temporary decline in revenues, the offer might also speak to immediate cash flow needs vs. the overall health of the entire business. But if your company is going through more serious issues that are 100% long-term, then you should take this offer while you’ve still got one.
But what about your financial situation?
There’s a chance you might take an offer just because you are making the best of a bad situation. However, you might want to consider all the issues that might come if you are unemployed.
While you are taking early retirement from this company, this doesn’t mean that you have to retire! You might also consider in which way the offer is affecting your retirement finances, like Social Security.
So if you want to take a lifestyle decision and work, you are in an enviable position. Even if you want to work or not, you should still assess your financial future, especially if you’re younger than the retirement age.
Chuck Czajka, the founder, and CEO of Macro Money Concepts in Stuart, Florida, warns that “the younger you are, the more you will place additional stress on your retirement assets.”
On the other side, if you are one of those people who doesn’t need to work anymore to pay their bills, you probably saved enough to be financially independent. In this case, you won’t have to worry.
You might also want to ask yourself:
- Is there enough money to live comfortably in retirement?
- Are you old enough to access all those retirement accounts like 401(k) or IRA penalty-free?
- Will you have access to healthcare, and will you be able to afford it?
- What other sources of retirement income would be still available?
- Will it affect your pension (traditionally defined benefit plan)?
- Do you have hobbies or any other pursuits that you are very passionate about, so you can keep on being motivated and engaged?
How it will affect your Social Security
As we’ve seen before, retiring earlier might have a negative impact on your Social Security checks. According to Czajka, “planning to maximize your benefits might actually have a very important impact on your retirement income.”
Plus, you might be factoring in Social Security to fund a part of your retirement, but in order for you to receive the full Social Security checks, you will have to wait until you reach your retirement age, which might be years of a wait if you consider retiring earlier.
Can you negotiate?
If you consider accepting, at least read more about what made others decide what’s reasonable to request or not. Plus, if you want to negotiate some aspects of the package, be ready to provide some explanations on why you are asking for a better package that’s more properly suited for you.
If your employer won’t be able to afford more money, but they manage to offer some health benefits which you could get from your spouse, then they might agree to pay you the whole value of the health insurance benefit in cash.
Or, as an alternative, instead of paying the whole salary in a lump sum, you might want to ask them to pay it out over a longer period of time, or vice-versa, depending on your needs.
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