Taking Early Retirement… Good Or Bad?

The job market is pretty grim with more than 438,000 jobs have been lost already this year,
according to the Bureau of Labor Statistics, and companies across a range of industries,
from financial services to retail, have been extending early-retirement packages in an effort
to slash workforces.
If you’re offered such a buyout, you’ll face one of the most important financial decisions of
your working life: STAY or GO?
Strictly by the numbers
The enticements you’ll get to retire early likely won’t offset the drawbacks of spending
fewer years at the office. To understand why, you must first understand what you’re being
offered.
Most retirement buyouts have two parts: severance, usually one or two weeks of pay per
year on the job, and a sweetened pension, with as many as five years added to your age and
job tenure.
Say you’re 55, earn $125,000 and have been working at your firm for 20 years. Using the
most common pension formula – years of service times 1.5%, times your salary – you’ve
earned $37,500 in annual retirement income.
But to collect a full pension, you generally must work until age 62. The younger you are, the
more it is reduced. In this example, retire at 55 and you’ll get just $22,500.
With a buyout, though, your pension would be calculated as if you were 60 and had
worked for 25 years, bringing you up to $41,250 a year. That’s tempting, especially
since you’d earn only a slightly bigger pension ($47,820) if you worked another five
years.
The problem is, that you can’t collect Social Security until you’re 62, and you can’t
support yourself on a pension alone. If you figure you need 80% of your income – or
$100,000 – to maintain your lifestyle, you’ll start out short by $58,750 a year. And
you’ll remain short even after Social Security kicks in. To cover that gap, you’ll need
to have banked about $1.4 million Or you can take the package and find another job.
But bear in mind: Only 60% of workers age 55 who lose their jobs are re-employed
full-time within two years.
All this math may be meaningless if the early retirement offer comes at a time when
your job is in jeopardy, or your company is at risk of going under. Attractive buyouts
can foreshadow forced layoffs with far less generous terms. When the buyout window
shuts, it’s usually closed for good.
In that case, take the money. Ask if you can stay on the payroll for a while instead of
getting severance as a lump sum. That way you’ll have health insurance while you
look for another job.
The bottom line – For most workers in their fifties, it makes sense to keep working
and keep saving – if you can. For more information or if you have been offered a
buyout, contact us ASAP, we can do an income analysis and find out if the buyout or
early retirement will be good for you!