Early Retirement or Buyout Offer – Should You Accept?

Your employer wants to trim the payroll and offers you a financial incentive, such as an early retirement or buyout package, to leave voluntarily. What do you do? How do you know whether the offer is a good deal? Here are a few things to consider when evaluating the offer and making your decision.

Are you ready to move on?

If you were planning to leave in a year or so anyway and your employer offers you a severance package to leave now, your decision to accept the offer may be an easy one, particularly if the severance package is sufficient to fund your own business, or whatever else you had planned.

But if you were planning not to leave and you have several years to go until your desired retirement date, your decision may be more difficult, both emotionally and financially. If you want or need to continue working, it’s a good idea to assess your prospects before making your decision. Some employers may provide outplacement services to assist you with finding employment elsewhere.

What is in the offer?

To determine whether the early retirement or buyout offer is a good deal, you need to know how much you can expect to receive and for how long.

The cash component of the offer, also known as severance pay, is often based on salary and years of service. Keep in mind that there is more at stake than just pay. A large percentage of your current compensation package may be in the form of benefits, such as health insurance, disability insurance, life insurance, stock options, unused vacation and sick pay, etc. How does the offer address these items?

Does the offer include health benefits?

Some employers may offer to cover all or part of the cost of health insurance for a specified period of time. If health insurance is not part of your offer and you are not yet eligible for Medicare, how will you bridge the coverage gap until you get a new job with health benefits or until you become eligible for Medicare at age 65?

There are options to consider that we would be happy to discuss with you.

How will retiring early affect your retirement savings?

If you accept the offer and retire earlier than planned, be sure to consider how this will impact your retirement savings. Do you have enough to cover the extra time in retirement? Also keep in mind the 10% early withdrawal tax penalty will apply to withdrawals from your IRA and retirements plans before the age of 59 ½ unless an exception to the penalty applies.

Will leaving the company affect your pension?

If you have a traditional pension, keep in mind that pension benefits are typically based on your compensation and years of service. If you leave the company now rather than years from now, your benefits may be lower unless the severance package adjusts them for you.

Will retiring early affect your Social Security retirement benefits?

It may if you need to apply for benefits sooner than you planned. This is important to consider before accepting the severance package as well.

Can you afford to take the offer?

Is the offer – pay, benefits, and other perks – sufficient to protect your financial security until you can find a new job or until you reach retirement age you planned on?

Can you afford not to take the offer?

It is important to consider the long-term prospects of your company and your position in it when evaluating an early retirement or buyout offer. While you may want to continue working for your employer, what are the chances that your position may be eliminated soon? And if you pass on this offer, will the company’s next offer be as favorable?

Accepting an early retirement or buyout offer can have long-term financial consequences. Please consult with us for advice before deciding whether to accept it. With offices in Rutland and Williston, Vermont Copper Leaf Financial develops a customized wealth management plan designed to integrate every aspect of your financial life. Our approach is to provide clarity and calm amidst the chaos. Where there is uncertainty, we look for facts. We call our approach evidence-based investing. Call us today at 802-878-2731 to schedule a strategy session and begin building your road map to financial success.

Article published in July 2021 edition of Eye on Money. If you would like to be added to our mail list please email jennifer@dh-cpa.com.