Should You Take An Early Retirement Buyout?
So, your employer, who you’ve been with for many years, has just offered you an early retirement buyout. Now you are asking yourself: Should I take an early retirement package?
During this time of pandemic and even beyond, employers who are hard hit may be increasingly using early buyouts as a tool to trim their workforce and cut expenses.
At Prime Wealth Advisors, we know how unique financial plans can be, and that your decision may be a complex one, with many moving parts. Let’s take a glance at what’s involved in the decision-making process:
You Are Offered An Early Retirement Buyout, Now what?
Depending on what point you’re at in your life, early retirement may be a viable option. If you’re at the point where you’re beyond the major obligations- the mortgage is paid, kids are done with college, early retirement may indeed be an option. This is, even more, a possibility if your retirement savings are well in place, and you have non-retirement liquid assets to fall back on between now and retirement.
Before we go any further, please listen carefully to this next sentence. We will amplify it even more later in this piece. The best decision you can make from the get-go may well be to sit down with a financial advisor to give you an impartial opinion of your situation and guide you as to whether or not taking the buyout is in your best financial interest. At Prime Wealth Advisors, we understand that protecting your wealth, and making good financial decisions can help get you onto or keep you on the right track to reaching your goals. We hope you will find the following tips helpful:
Early Retirement Buyout Basics
Let’s take a glance at some of the things you may need to be thinking about even before you talk to an advisor. Early buyouts are usually based on work history. Often, employers will offer one or two weeks of pay for every year of employment. For the professional, whether in health care or a general business executive, this could look like the following: For someone who has been earning $150,000 per year and has been with a company for 20 years, the weekly pay- $2,885 is multiplied by 2 (assuming 2 weeks of earnings are offered) to yield $5,770 as the base. This is then multiplied by 20 years. $5,770x20=$115,400. This may be a typical scenario for a professional.
Some early retirement packages, particularly for the professional, may be sweetened with incentives like paid health and dental insurance, for a specified period of time. Many times, outplacement services are offered to those interested in seeking other employment. Keep in mind that these incentives may be negotiable by you, particularly if you don’t need or accept all of them. If this is the case, they can be a bargaining chip for you. For example, you might consider asking for more in the lump sum payout in return for giving up these incentives. Another option- forgo the sweeteners if they’ll allow you to put some of your payout in the company 401k or even into your own personal IRA account. This strategy may mitigate some of the hefty income taxes you’ll be paying on the lump sum.
Is Early Retirement Right For You?
For those of you who are certain you are not a candidate for early retirement but are not far- off, (let’s call you pre-retirees) you still have an important decision to make. Should you take the buyout and look for another job, or just stay put and ride out your job for as long as you can? If you refuse the offer, you may be laid-off at a later date with a different, inferior package than what you’re being offered now. Remember, you are being made this offer for a reason. Your employer may have doubts about your long term future with the company. Do you want this to be hanging over your head into the future? If other employees are being offered early retirement, some of the people you enjoyed working with will be gone. This could be a large factor in determining how happy you will be in the company without them.
If you opt to take the buyout and plan on getting another job- can you find one at an equal or higher salary? Is it actually more likely you will have to take a major pay cut? In the very worst case, is it possible you’ll need to reinvent yourself in an entirely new career?
On the positive side, a generous package may give you the opportunity to use the money as a means to start that business you’ve always dreamed about. Or to do something, even part-time, that satisfies a need you’ve always felt to do something creative; such as in the arts, or perhaps writing.
How a Financial Advisor Can Help
As we mentioned earlier, when faced with the complex choice of taking a buyout offer or not, the best thing you can do is to sit down with a knowledgeable financial advisor. The advisor can offer expert advice to guide you in the decision- whether to refuse the offer, take it and look for another job, or retire into the sunset.
A knowledgeable advisor can assist you in understanding the financial ramifications of a package and how well it is in alignment with your financial needs and goals. He or she can illustrate various scenarios around accepting or rejecting the offer. Don’t make the mistake of thinking you can just take the offer now and hire an advisor later to help you figure out your finances. Consider making this person instrumental in your decision-making process.
If you don’t have a financial plan in place yet, now is the time to get one. An advisor or advisory firm, such as Prime Wealth Advisors, can help you not only with retirement planning, but also with investment management, tax advice, risk management, and overall estate planning.
So, you and your advisor or advisory firm have determined it makes sense to take the offer and retire early. What now? One key thing in the financial plan the advisor will create is a calculation of how much income you will require in order to cover your expenses in retirement. They will also figure out where that money will come from. Your advisor will work out a financial plan for you based on your existing assets plus the buyout amount. He or she will help you determine how much you can safely withdraw from your assets each year to cover your expenses. They will also help you determine how much you may need to make in a new part-time job in order for you to retire comfortably. So, in the decision as to whether or not to take an early retirement buyout offer, or to put in place a plan for your financial life post-buyout, your wisest decision will be to hire a pro: A professional financial advisor.
All of the professionals at Prime Wealth Advisors have one common goal: To help our clients get onto their unique path to a more comfortable and secure retirement. Contact us today for a complimentary consultation.