Is “Early Retirement” the Right Plan for You?

With market volatility and economic uncertainty these days, including the potential for an extended period of relatively high inflation adding to household expenses, some people may be rethinking their retirement plans. They may believe it makes more sense to continue working and earn whatever they can, in order to build wealth for the financial future they want.  

Retiring early is typically a career goal for high-earning senior executives who must often work long hours under extremely stressful conditions. This type of prolonged stress can create physical and mental health issues over time, and even cause personal/family relationships to be strained. However, as the time nears when it actually becomes a possibility to retire, 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 COVID-19 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 might help other colleagues keep their jobs—and these could be individuals who may still depend on employment income to meet their various financial obligations. While that consideration alone shouldn’t be the primary reason someone decides to wrap up their career, a voluntary retirement program can potentially lead to positive outcomes all around.

Things to consider before retiring early

Financial professionals like a Corient Wealth Advisor can use planning software and strategies to develop sophisticated 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 can entail a drastic lifestyle change and if you’re not adequately prepared, you could be disappointed in your decision to leave the workforce earlier than planned.

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 years before then. 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 likely be with layoffs and early retirement incentives.

At times a lump sum is offered to buy out someone’s monthly pension amount. To evaluate whether the offer may be 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 worth considering the 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 specific guidance before making a decision.

Ultimately, deciding on early retirement is personal, with many factors to consider. Keep in mind that 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. Or perhaps you can tap into your entrepreneurial spirit and embark on a “passion project” or even start your own business.

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 and staying engaged with others in a satisfactory, meaningful manner?

Financially, age can have 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 or IRA start date.  When retirement savings withdrawals are used for this purpose, not only could they be subject to an early withdrawal penalty, but 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—as much as 30% if taken beginning at age 62 rather than the standard (i.e., “full”) retirement age of 67.¹

Does early retirement make sense for you?

Whether or not you take early retirement is a highly individual choice contingent upon many different factors and considerations. As you ponder this important decision, here are a few things to think about and get answers to.

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, personal loans, etc.).
• Pension. If you’re vested in a pension, taking early retirement could impact the amount of your 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?
• When will non-qualified retirement plans pay out?  (These are not eligible for rollover to an IRA and are often a forced payout, subject to ordinary income tax.)
• Will the employer pay for health benefits and for how long?
• Will the employer offer you health benefits in retirement?
• How will the severance 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 raise your taxes if you don’t find a way to mitigate the impact of a lump-sum payment.
• What happens to your equity? Will unvested shares vest, and is the exercise period unique to the early retirement package rules?

Retirement planning can be highly complex, depending on your personal and financial circumstances. The decision to retire early adds an extra layer of complexity, so be sure to think through the pros and cons carefully, discuss with family members, and consult your Corient Wealth Advisor for guidance based on your unique situation.

¹ https://www.ssa.gov/oact/quickcalc/earlyretire.html

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