Should You Take that Early Retirement Offer?

With the economy slowing more people have to face one of work life’s more difficult issues:  Should the early retirement offer be accepted?

Evaluating the value and merits of a buyout offer can be difficult, because the offer contains many parts. Here is a summary of key points to consider when a buyout offer is received.

What is next? What the employee might do after accepting or rejecting the offer is key.

In most cases the best employees take buyout offers because they are confident of finding new work. Quality employees who reject the offers can find themselves in position to rise faster than they would have before the work force shrinkage. In addition, the employer might make better buyout offers a year or two later.

It also is possible, however, that the company folds or is purchased, and the employees who stayed have neither jobs nor the buyout package.

When the buyout offer is accepted, will the employee retire or seek other employment?

The ideal situation is to accept the buyout offer, and then take a new job with the same or similar compensation. The worker is in the same financial position, with the addition of the buyout benefits. Before traveling down this road, however, the worker needs to take a look at the job market. Are comparable jobs available for similar compensation? Will employers hire someone in the worker’s age group? Will it be necessary to relocate or change industries to receive adequate compensation? Workers who have not tested the job market for a few years need current information before deciding.

Senior, competent employees often need months to find a suitable position. Expenses have to be paid during that time. The buyout package might merely be enough to maintain the current lifestyle until a new job is found. Also, there are additional costs associated with a job search. In that case, the employee would have been no worse off and perhaps better off staying in the old job and looking for work at the same time.

When the employee leans toward retiring after the buyout, a careful analysis of key factors is required. Those who receive buyout offers usually had not seriously considered retirement at that point. They have not analyzed the details of retirement and risk venturing into this phase of life unprepared.

Health insurance is often overlooked. Those who receive buyout offers often do not realize how much the coverage costs and how difficult it can be for someone age 50 or over to obtain individual coverage in many markets, especially if the person has health issues.

Medicare does not kick in until one is eligible for Social Security. The cost of coverage before that can make or break a retirement plan. Continuing coverage from the employer can be purchased through the COBRA requirements, but that lasts only 18 months and can be expensive. Sometimes an employer negotiates individual coverage for employees as part of a buyout plan. Most often, the employee is on his or her own to find coverage until Medicare takes over.

The prospective early retiree needs to evaluate the full financial picture to determine if current resources plus the buyout offer make retiring now viable. Employees must look beyond current income and expenses Retirement is likely to last a long time for those retiring before normal retirement age.

Inflation, home maintenance and repairs, replacing cars, and other costs outside of the day-to-day expenses need to be considered. Failure to factor these into a retirement plan can create a significant shortfall.