Is “Early Retirement” the Right Plan for You?

Retiring early is typically a career goal for executives who must often work long hours under highly stressful conditions. However, as the time nears when it actually becomes a possibility, it may lead to a tough decision.

When a company offers an early retirement package to its executives, it’s often viewed as a sign that the company cares about its employees and their well being. While some companies may impose retirement on certain employees—something that became more common during the pandemic—voluntary exit programs can give people more control over the timing of their departure and whether to participate in the program. If enough people accept the voluntary package to help their company reach its chosen cost-savings or headcount reduction goals, it’s possible to help others keep their jobs—and these could be individuals who may still depend on employment income to meet their various financial obligations. A voluntary retirement program can potentially lead to positive outcomes all around.

Financial professionals like a Corient Wealth Advisor can use planning software and strategies to develop financial models for their clients, to help them determine if offered retirement packages are appropriate for them and their unique financial circumstances.

Some clients who otherwise were planning to retire in the next couple of years will likely welcome a voluntary, early retirement package. However, they should also think beyond the initial financial boost and consider what retirement really means for them and their family. Retirement entails a drastic lifestyle change and if you’re not adequately prepared, you could be in for a shock and be highly disappointed at leaving the workforce too soon.

Early retirement packages are traditionally reserved for employees who have significant tenure with the company. Instead of retiring at the common age of 65, for instance, an employee might get an offer from their employer to retire early. In exchange, they may receive a sizeable severance package and potentially a healthcare account, while also gaining early access to a pension if they agree to move up their retirement date.   

Companies are in the business of being profitable, and they’ll often examine how to reduce costs. Generally speaking, their primary costs are salaries and employee benefits. As a result, early retirement packages will lead to corporations taking a slightly larger financial hit up front, in order to save them significant costs over time. The more money they need (or wish) to save, the more aggressive they’ll be with layoffs and early retirement incentives.

Frequently, with such packages, a lump sum is offered to buy out someone’s monthly pension amount. To determine if the package is viable, consider using the “6% test.” With this test, you take the monthly pension offer and multiply it by 12, then divide that amount by the lump sum offer. The result is the annual percentage rate. If the annual percentage rate for the monthly pension reaches or exceeds 6%, the monthly pension option might be worth considering. If it’s less than 6%, it may be better to accept a lump-sum payment instead of the monthly amount. This test is merely a rule of thumb, and your own situation may be different. Again, consult with your Corient Wealth Advisor for guidance.

Ultimately, deciding on early retirement is personal, with many factors to consider. Your decision will likely have long-term financial implications. For instance, if you have the skills and opportunity to reenter the workforce by taking another job, it empowers you with more flexibility to accept the buyout offer from your current employer.

As discussed, finances aren’t the only consideration when contemplating early retirement. Are you emotionally prepared for the new direction that your life could take? Can you adjust to a new routine with possibly a lot less structure and more onus on you to find ways of occupying your time in a satisfactory, meaningful manner?  

Financially, age has a significant bearing on whether early retirement is “right” for a given individual. After all, people who are far away from normal retirement age may need to generate an income source that can cover the gap between their retirement date and Social Security start date. If retirement savings withdrawals are used for this purpose, not only could they be subject to an early withdrawal penalty. They could also introduce the risk of an individual outliving their assets. As well, tapping early into the Social Security benefit means the payout amount may drop significantly.

Early retirement: Is it right for you?

Consider: 

• Health insurance options. It’s often more expensive to purchase an individual policy as opposed to getting insurance through an employer.
• Current savings relative to your financial obligations (such as a mortgage, student loans, etc.).
• Pension. If you’re vested in a pension, taking early retirement could impact the amount of pension payments over the long term.
• Your time. Will you seek employment elsewhere? Do you have hobbies or volunteer opportunities to help you avoid the distressing effects of boredom and lack of purpose?

Ask: 

• Will the employer credit you with extra years of service so you can begin collecting retirement payouts?
• Will the employer pay for health benefits until you’re eligible for Medicare?
• Will the employer offer you health benefits in retirement?
• How will the payouts be structured? Is it a single lump sum or payments over a period of time? If it’s a single lump sum, this could push you into a higher tax bracket for the year in which you receive the payout, which will likely affect your taxes.

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