February 16, 2011
By Staff Reporter
By Kevin FitzGerald
My husband has worked for a major company all his working life. So it came as a shock when they suggested early retirement. I’m not sure how to begin to consider our options. Could you help?
J.O., Mineola
For a fortunate few, early retirement is still a self-determined goal, achieved through careful financial planning and wise investing. In today’s corporate cost-cutting environment, however, it’s quite likely that your employer may take the initiative, extending an early retirement offer to you as part of an effort to trim overheads and increase profitability.
According to the Employee Benefit Research Institute, the increase in early retirement programs caused the average retirement age to decline from 65 in 1970 to 63 today. With today’s longer life expectancy, your retirement years may account for up to one-third of your life span.
Whether you choose early retirement on your own or accept a company offer, your priority is to carefully assess your own financial needs and resources. While some of your expenses will decline or disappear after you stop working, the rule of thumb says you will still need approximately 75 percent of your pre-retirement income to maintain your current lifestyle. And don’t forget that taxes and inflation will continue to take their toll. Even if inflation stays near 4 percent, you’ll need $1,480 10 years from now to match the purchasing power of $1,000 today.
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An early retirement offer will require you to make many decisions sooner than you planned. To encourage people to accept the offer, some employers provide certain incentives that expire in 30 to 90 days. As an extra inducement, companies with defined benefit pension plans may also add as many as five years to your current age and to your length of service for the benefit calculation, thereby increasing your income considerably.
Besides pension benefits, companies may offer a severance payment that can be based on length of service or a flat percentage of salary. While the extra cash may help you through the transition period, remember that it will probably be taxed as ordinary income.
Because of the legal issues involved, these offers can be complicated, so it’s wise to seek help from your accountant or financial advisor, who can help you with the various "what-if" scenarios.
You’ll first need to weigh the value of the incentives against what you would get if you continued to work. Giving up a regular paycheck means also giving up the future salary increases that create larger pension benefits down the road. You also forego the opportunity to accumulate assets in your company savings plan. But you may prefer to take a sure thing now rather than face any uncertainty about your future or your company’s future. Most important, however, you need to be sure you’ll have enough money to afford the lifestyle you choose after retirement, whether it be complete retirement, working part-time, or perhaps beginning a new career or starting your own business.
Early retirement will also affect the amount you will ultimately receive from Social Security, which is based on your average earnings over 30-35 years of work. And while you may be able to begin collecting at age 62, you will have to sacrifice about 20 percent of what you would have received if you waited until 65. For help in estimating what our Social Security will be, you can call Social Security at (800) 772-1213. Some early retirement packages offer lump sum or monthly payments to help bridge that gap until Social Security begins.
The way your employer will handle your health insurance is another important factor to consider. The most generous plans continue to subsidize major medical coverage until age 65, when you are eligible for Medicare, but with the continued escalation in health care costs, these benefits are becoming increasingly rare. Some companies may keep you in their group plan but require that you assume more of the premium costs, which may amount to as much as $2,000 a year (but that’s probably less than what you would pay for a new policy). Few employees continue coverage for dental and optical care.
If you decide to accept an early retirement offer, the next decision you have to make is what to do with your pension benefit. Before you make such a decision, you should seek the advice of a tax advisor, who can help you with the finer details of the tax laws, and a financial advisor, who can help you develop an investment plan suitable to your retirement needs.
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The information contained herein has been obtained from sources believed to be reliable, but we cannot guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
Kevin FitzGerald is First Vice President-Investments at PaineWebber. He focuses on the areas of professional money management, asset allocation and retirement planning. He can be reached at 1 (800) 423-3381.