Important considerations to make before accepting an early retirement package

Marc Winnipeg Financial AdvisorCompanies will often offer employees early retirement packages to encourage them to retire. This is usually done when the company is looking to cut costs and reduce staff. Before making a decision, there are many questions to be addressed. All of which are specific to individual preferences and circumstances. Here are eight such considerations to factor in before making your final decision.

1. How does the package compare to what you would have received upon your planned retirement date?

If your employer allowed you to bank 50 days of vacation time upon your planned retirement date, make sure that it’s still part of the early retirement package. Having these 50 days added to your income can add up to 5% to your pension benefits. That’s a lot of money once factored over your entire retirement. If you expect there will be other early retirement packages offered in the future, you could refuse their offer until you’ve accumulated the maximum bankable vacation time.

Some defined benefit pension plans will give you the option of commuting your pension or taking the monthly benefit. Choosing the option that works best for you is dependant on many factors (read Pension or Lump Sum? How to Decide for more information). Make sure both these options are part of the early retirement package if they would have been available on your planned retirement date. Not having options limits the opportunities you have to achieve your goals.

In some instances, your pension benefits are reduced if you retire before your normal retirement age. Look to have these penalties reduced or eliminated as part of the package.

2. Will the package provide continued health benefits and insurance?

Your employee benefits plan will usually cover a portion of costs for dental, vision, physiotherapy, and prescription drugs. They not only provide this coverage for you but also your spouse and children. If your health benefits are lost, you’ll want to ensure that your spouse has coverage available through their employer to ensure that your family is still covered. If not, you will need to purchase a private plan which can be quite costly if trying to replicate your work plan. This is an additional cost that should be factored into your retirement plan.

Along the same vein, if your life and critical illness insurance coverage is lost, you may need to purchase a private insurance policy to ensure your family is still protected. Private policies are more difficult to obtain as they are dependant on your health. If you’re not healthy at the time of application, you might not qualify for coverage, or it could become costly to have the same protection as what was offered by your employer.

3. What are the tax implications of the offer?

There is generally an incentive included as part of the package to encourage employees to accept the offer. This is a payment that is typically offered as a lump sum payment or a bridging allowance. If a lump sum payment is received, it would be taxable and added to your income for that year. If the payment is received towards the end of the year, it may push you into a higher tax bracket when added to your salary for the entire year. If this is the case, you may be disappointed to find out that a good portion of the lump sum would go towards taxes leaving you with a smaller incentive. If the lump sum is paid at the beginning of the year, there should be less tax payable as you won’t have a full year of salary in addition to the lump sum. See Timing your retirement to save tax $$$ for more on the subject.

A bridging allowance would mean that you continue receiving your salary for a certain amount of time after accepting the package. This would allow your income to remain relatively stable as you adjust to retirement or look for a new job. This option could be more advantageous as you don’t have to deal with a lump sum payment which could incur substantial tax.

4. Are you able to negotiate a better package?

If you’re familiar with Michael Scott from The Office, you’ll know that his first rule when entering into negotiations is never to accept the first offer. You likely negotiated your salary when you joined the company so it shouldn’t be any different on your way out. If you’re a frequent user of Kijiji, you’ll know that no one ever pays full price. If an item is listed for $100, you’ll likely end up paying $80 for it. There is always some wiggle room. If your employer is explicitly targeting your position, you may have leverage to negotiate a better package. Better to explore your options rather than leaving extra money on the table.

5. What if you don’t accept the early retirement offer?

You may be able to continue working in your role without any major changes. This often occurs when enough employees accept the offer, and the employer reaches its staff reduction target. This is a good scenario as you can continue on with your retirement plan as if the early retirement package was never offered.

In some instances, the results aren’t as positive. You could become the target of future cuts, and the terms of the package may not be as favorable at that time. There is also the potential of a reduction in available hours or being transferred to another department. Your retirement plan may not be feasible with a reduction in income and you might not be interested in starting from scratch in a new area.

There is also the possibility that your position is eliminated altogether. You may be offered a severance package, but the terms would likely not be as favorable as taking the early retirement package in the first place.

Careful consideration must be made before refusing an early retirement offer. It’s important to have an understanding of what your employer is trying to achieve with the cuts. If they are trying to trim the staff, then it may be okay to refuse the offer. If they are planning on eliminating your position in six months, it’s better to accept the offer today.

6. What will you do with your time if you retire?

These offers can come out of left field, so take the time to determine if you’re ready to retire. Accepting an offer in your early fifties could mean a retirement of over thirty years. That’s nearly as long as you’ve been working. If you don’t have a plan as to what you will do with your time, you may begin to feel that you are no longer a contributing member of society or that you lack a sense of purpose.

Also, your spouse may need to continue working for another ten years before they can retire. This could create resentment and hurt your relationship if you’re able to fill your days with things you love while your spouse goes to work.

If retirement envy is not an issue, this could be an opportunity to focus on your hobbies or to spend more time with your children or grandchildren. You could also take on a part-time job or volunteering which could fulfill your sense of purpose.

7. Are there other jobs available that could provide you with a similar income?

Even if you accept the offer, you may want to work for a few more years before taking your actual retirement. In this case, you must make sure that there are suitable job opportunities in your field that you could accept. There could be a lot of opportunities, but it may come at the price of uprooting your family. If your family is not open to relocation, it’s best to refuse the offer.

If you’re looking to work for a competitor in the same industry, you may be blocked by a non-compete clause. In which case, you would not be able to work for a competitor for a pre-determined period of time. You may have to find work that is not in line with your skill set. There is also no guarantee that a competitor will hire you after the non-disclosure has passed even if they’ve been trying to lure you away for years.

8. What impact will this have on your financial picture?

The most important consideration is the effect that the package will have on your financial picture. A thorough analysis of your overall retirement plan is required to make sure that accepting the offer aligns with your family’s goals. If your retirement plan dictates that you must continue working for another five years to achieve your goals, then perhaps refusing the offer is your best option even if there are significant incentives. See Am I on track to retire for related information.

Careful consideration must be taken when offered an early retirement package. Simply because you have a co-worker accepting or refusing the offer does not mean that you should do the same. Speaking with a trusted professional financial advisor can help you weigh the pros and cons of each option and make an informed decision. An evaluation of your personal circumstances may help to identify some variable that pushes you in one direction over the other.

Marc Sabourin is a Winnipeg based Financial Advisor with Harbourfront Wealth Management. His focus is on helping pensioned employees achieve their retirement goals. He draws on his real-life experiences to explain strategies that are often presented as intricate. He believes financial literacy is an integral part of one’s financial well-being and his goal is to make learning about these topics fun and enjoyable.

Winnipeg Financial Advisor