An Offer to Retire Early: Should You Take It?

As the pandemic continues and companies try to cut costs, early retirement packages are becoming more and more common. Employees age 50 and older typically receive these offers, though in today’s uncertain times, even those in their 40s may be considered for early retirement. Though a voluntary separation might not be ideal for you, it will give you more time to review your options than being laid off unexpectedly.

If you’re offered an early retirement package, which usually includes severance pay, extended health insurance coverage and perhaps even a pension payout, you’ll want to consider a number of factors before accepting. Think about if you will be interested in continuing to work after accepting the buyout and what the job market is like for your skills. If you’re able to start another job, you’ll have fewer financial concerns than if you plan to stop working altogether.

Consider your budget

An early retirement package might include a large lump sum payment that could seem like enough to cover all of your expenses and even make a few splurges. Remember, taxes will be taken out of your severance pay and you’ll have to make the remainder last until you get another job or are eligible to draw retirement benefits, so be conservative with your spending. The younger you are, the longer it will be until you can apply for Social Security. Take a look at your household budget to see if the early retirement package can cover your costs in the meantime.

  • Consider your current budget and any outstanding expenses you might have in the future, like tuition payments for college or debts that need to be paid off.
  • Will your retirement savings, combined with Social Security payments when you’re eligible to receive them, allow you to cover expenses if you aren’t working?
  • In retirement, the best-case scenario is to have 80 percent of your former income. If that’s not possible, can you cut down on your expenses enough to make ends meet?

As you consider your financial future, know that filing for Social Security before your full retirement age permanently cuts down on your monthly benefit. The age to receive a 100 percent payment is 66 now and will increase to age 67 over the next few years. So, for example, if you apply for benefits at age 63, you will lose 23.3 percent of your benefit, almost a quarter of your expected payment.

Individual retirement accounts

Depending on your portfolio, the amount in your individual retirement accounts can vary due to the ups and downs of the stock market. If you’re approaching retirement age, however, you should be making adjustments to reduce the number of more risky investments, such as stocks, in your portfolio.

Try not to make hurried decisions based on how your account balances may have been affected this year, as your retirement savings are a long-term investment. Many stocks that took a big hit in 2009, for example, have still increased greatly in value since then. If you lose your job, taking money out of your retirement accounts early should be considered as a last resort, even though the 10 percent early withdrawal fees have been waived as part of the CARES Act.

Healthcare considerations

Health insurance is a huge concern, and no matter how old you are, you’ll want to continue your coverage. If you are under the age of 65 when you are offered early retirement, you likely won’t be eligible for Medicare unless you have certain health conditions. If you don’t qualify for Medicare and you have lost your employer-based healthcare benefits, you can buy your own plan through the Healthcare Marketplace. Completing a Healthcare Marketplace application will also let you know if you might be eligible for programs such as Medicaid or the Children’s Health Insurance Program (CHIP). If you’re married, another option might be to join your spouse’s health care plan.

You can continue your healthcare coverage with COBRA for up to 18 months after you lose your job. However, paying out-of-pocket to continue being covered by your employer’s insurance plan can be quite expensive. If you can, negotiate with your employer to cover some or all of your insurance costs as part of your early retirement package. Even 18 months of COBRA may not cover the gap until you’re eligible for Medicare coverage, so it’s important to keep that in mind in planning.

Weigh your options

If you’ve been offered an early retirement package, it’s a decision that should be evaluated carefully, and with so many variables to consider, seeking guidance is an important step of the process to ensure you’re making the best decision for your unique situation. At Wickham Financial & Insurance Services, our specialty is clear financial planning and we look forward to helping you navigate next steps on your financial path.


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