So you’ve just been offered an early retirement package. These packages can seem like a lifeline as your employer downsizes or restructures, but it’s not always the right fit for everyone. Before making a decision, it’s essential to fully understand what’s included and how it will affect your long-term financial security and lifestyle. Here’s what you need to consider before deciding whether to take the offer.

What Is an Early Retirement Package?

An early retirement package is an offer from an employer to encourage employees to retire ahead of their planned schedule. Companies typically use these packages in an effort to amicably reduce their staff and, in turn, their payroll expenses. The package usually includes financial incentives and retirement benefits to ease the (often unexpected) transition.

What Does an Early Retirement Package Include?

Each package varies, but most contain a mix of financial compensation and benefits to help employees transition from full-time work to retirement.

Severance Pay

Severance pay is typically based on your years of service and can be offered as a lump-sum payment, salary continuation, or payouts for unused vacation days. Some packages include bridge payments to help cover the gap until you start receiving Social Security or pension benefits.

Health Insurance Benefits

Early retirement packages often include extended health insurance coverage, either through the employer’s plan or the Consolidated Omnibus Budget Reconciliation Act (COBRA). The latter can be costly, and the coverage only lasts between 18-36 months.

Pension Benefits

Your employer may add extra service years to help you qualify for pension benefits or to increase the value of your pension. In some cases, early retirement offers may allow you to begin receiving pension payments earlier than usual.

Additional Benefits

Some packages may also include other benefits like financial planning assistance, outplacement services to help you find new employment, or the option to retain company equipment like laptops or phones.

What to Consider Before Accepting

While early retirement offers may seem appealing, it’s important to carefully assess your financial situation and lifestyle goals before deciding to accept an early retirement package.

Financial Readiness

Assess whether your retirement savings, pension, Social Security, and other sources of retirement income will provide enough funds to meet your needs. When will you need to start tapping into your retirement accounts? Withdrawing early means less time for your investments to compound and grow, and withdrawing too early could end up diminishing your savings. For instance, withdrawing from certain accounts, such as traditional IRAs, before age 59 ½ could result in early withdrawal penalties.

Healthcare Costs

Healthcare can be one of the largest expenses in early retirement. If you’re not yet eligible for Medicare, most employers offer coverage through COBRA, which allows you to temporarily extend your employer-sponsored health insurance. However, it’s important to note that employers aren’t required to subsidize COBRA, meaning you’ll likely have to cover the full premium yourself. The coverage is also temporary, so it’s important to compare this option with alternatives, such as purchasing a plan through the Marketplace.

Your Retirement Lifestyle

Consider whether the income and benefits from the retirement package will support the lifestyle you envision, including plans for travel, hobbies, or relocation. Emotional readiness is key, too; retiring early can bring unexpected challenges, like adjusting to a new routine or finding purpose outside of work.

Exploring Alternatives

If you’re not fully prepared for retirement, it may be worth exploring alternatives before accepting the offer. Some companies allow employees to negotiate the terms of their package or offer options like part-time work or consulting roles. Others may offer phased retirement, where you can gradually reduce your hours while still earning income and benefits.

The Value of Professional Advice

Making sense of an early retirement package can be tricky, but working with a financial advisor can provide the clarity you need. A professional can assess the impacts of the offer on your overall financial security, helping to ensure that your retirement income will be sufficient to support your lifestyle and long-term needs. You’ll get a comprehensive understanding of the offer and how to make the best decision for your future.

Want personalized advice on evaluating early retirement offers and their impact on your financial plan? Ironwood Wealth Management can help you navigate your options and develop a tailored strategy to secure your financial future.