Is An Early Retirement Package Actually a Good Deal?

If you’re counting down the days to retirement, an early retirement offer can feel tempting. You can’t wait to relax and enjoy life after a lifetime of working, so why not jump in? Actually, early retirement packages aren’t the best idea for everyone. 

Before you pack up your office and sign on the dotted line, take the time to crunch the numbers. That way, you can make sure it’s the best choice for you. Here’s what you need to know about early retirement packages.

What Are Early Retirement Packages?

Also known as a “buyout,” an early retirement offer typically comes up when a company faces budget issues. Instead of mass layoffs, employers will take a look at staff who are close to retirement and make an offer. In exchange for retiring early, the company will offer a severance package. It helps offset the loss of income that early retirement will bring. For many retirees, though, Social Security income won’t kick in until at least age 62. Even then, your monthly check will be lower than if you waited until full retirement age.

“If you have a 401(k) but aren’t yet eligible for Social Security, you need to bridge that gap carefully,” advises Andrew Latham, certified financial planner and content director at Super Money. “For example, let’s say you’re 57 and need to cover living expenses for eight years. You may consider looking into the rule of 55 for penalty-free 401(k) withdrawals and check that your savings can last until Social Security kicks in.”

While these buyouts are typically more enticing to someone biding time until retirement, they aren’t limited to that group. In fact, your employer may offer a lucrative severance in exchange for your resignation with no connection whatsoever to retirement. As with early retirement offers, it’s important to crunch the numbers and make sure it works for you in the long term and not just the short term.

Financial Considerations for Early Retirement Packages

No matter how lucrative early retirement packages might sound, they likely won’t last throughout your retirement. That means you’ll have to dip into your retirement savings. Keep in mind that even if you qualify for penalty-free retirement plan withdrawals, you’re pulling from that account early. You’ll need to do some careful budgeting to stretch out the funds.

“A very generic starting point to help you calculate where you stand is the Rule of 4%,” said Nate Hanft, senior vice president and financial advisor at Wealth Enhancement Group. “This rule states that there is a high probability your 401(k) will last for your lifetime if you withdraw 4% of the balance each year.”

As you’re reviewing the offer, take a look at ways you can make the money work for you. Investing the funds can ensure any money you get from your buyout will grow during retirement.

“A major thing to consider is how you might invest that lump sum if you take it today,” suggests Joseph Camberato, CEO at National Business Capital. “Could you put that money into something that grows over time, like stocks or real estate? For instance, if you got $100,000 now, and you invested it in something that earned 6-12% a year, what would that look like if you retired five or 10 years earlier?”

Health Care Considerations

One often-forgotten part of early retirement is health care. Not only are you giving up any employer-provided insurance, but health care expenditures tend to rise dramatically after the age of 55. One unexpected surgery or long-term illness can take a toll on your retirement savings.

“Medicare is not available to retirees until age 65,” Hanft adds. “If you are considering an early retirement offer and have not yet reached age 65, you need to identify how you will handle health insurance.”

Reviewing the Offer

Employers usually leave a little wiggle room for negotiating. See if they can make a few adjustments happen. As Tyler Meyer, CFP and founder of Retire to Abundance, points out, through negotiations, you might be able to secure a higher payout or perks like extended health benefits. The negotiated offer could make the difference between accepting it or turning it down.

“When negotiating, emphasize your contributions to the company and express a willingness to be flexible,” Meyer recommends.

Accepting the Offer

Retiring early is a big decision, so don’t feel pressured to give an answer on the spot. Most employers will offer a reasonable deadline for a response. Typically, that deadline is 45-60 days in the future, so crunch the numbers and, if possible, meet with a financial planner to weigh your options.

“It’s important to compare the package to what you would receive if you continued working until your planned retirement,” Latham said. “This sounds obvious, but too often people get distracted by the buyout offers and forget to look at the big picture. Think of it like weighing two different job offers — evaluate the severance, pension, health care and how your retirement savings might be affected.”

Early retirement packages may help businesses avoid layoffs. However, they aren’t always the best choice for the employees considering them. It’s important to gather all the information and carefully review it before making a big decision like early retirement. As attractive as it may be to retire early, you’ll want to make sure you have enough money to live comfortably for the rest of your life.

Stephanie Faris is a professional finance writer with more than a decade of experience. Her work has been featured on a variety of top finance sites, including Money Under 30, GoBankingRates, Retirable, Sapling and Sifter.