In today’s corporate environment, where cost cutting, restructuring, and downsizing are the norm, many employers are offering their employees early retirement packages. As you near retirement age, you may find yourself confronted with an offer from your employer for early retirement. Your employer may refer to the offer as a “golden handshake” or a “golden parachute.” While early retirement offers seem attractive at first, it is important for you to review an offer carefully before accepting it to ensure that it is indeed a “golden” opportunity.
Typical Elements of an Early Retirement Offer
An early retirement offer usually consists of severance payments and post-retirement medical coverage coupled with already existing retirement benefits:
- Severance payments: Are usually based on your salary, the number of years you have worked for the company and can be distributed in either a lump sum or over a number of years. In certain cases, severance pay is considered “deferred compensation” subject to the requirements of IRC Section 409A. Ask your employer if your severance package satisfies Section 409A. If it doesn’t, you could be subject to a 20% penalty tax.
- Post-retirement medical coverage: Because of the high cost of medical care, you might find it hard to turn down an early retirement package that includes post-retirement medical coverage. These packages usually provide medical coverage until you reach age 65 and become eligible to receive Medicare.
- Bridging: Another type of early retirement offer is the Social Security “bridge payment.” Your employer provides you with temporary benefits to bridge the period between early retirement and the time when your Social Security benefits are scheduled to begin. The temporary benefits are usually equivalent to the amount you will receive from Social Security at age 62.
- Evaluating an early retirement offer: The decision of whether to accept an early retirement offer is not an easy one to make. Your company’s personnel department may provide either individual or group counseling to guide you during this important decision-making process. If counseling is not available, you should speak to the person in charge of employee benefits at your company. Find out what amount you can expect to receive each year after you retire. Then, figure out the difference between what you would collect if you retire early and the amount you would earn if you continue working.
Consequences of saying no to an offer: If you’re thinking about turning down your employer’s offer to retire early, be aware of the consequences. If you’re holding out for a better offer, keep in mind that the first offer is often times the most generous. Also, if you think there is a good chance you might be let go anyway further on down the road, you may want to accept a sure thing right away rather than face the uncertainty of your company’s future plans.
Consequences of saying yes to an offer: If you choose to accept an offer for early retirement, some companies may pay (in the form of a bonus) all or part of the difference between what you would collect if you retire early and the amount you would earn if you were to continue working. Be aware of any possible tax implications as well as the consequences to saying yes. Accepting early retirement means you will have less time to save for retirement, your retirement savings will have to last for a longer period of time and your pension may be smaller.
You should discuss your situation with an attorney and/or financial professional, a company-paid consultant may provide valuable information, but they may not necessarily be acting in your best interest. For more information about retirement, contact Scott Brady at 248.443.4234.
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