Early Retirement Considerations

Greetings! I trust that this finds you well and enjoying life.
 
As you near retirement age, you may be offered early retirement by your employer who may refer to the offer as a golden handshake or a golden parachute. The offer usually consists of severance payments and post-retirement medical coverage combined with already existing benefits. While many early retirement offers appear attractive, it is important for you to review an offer carefully to ensure that it is indeed offering a golden opportunity.
 
Early retirement, IRAs, and retirement plans
 
If you accept an early retirement offer, make sure that you’re aware of all possible implications. If you’re going to be using the money from your IRA or retirement plan to fund your retirement, remember that in addition to income taxes, there may be penalties if you withdraw the funds prematurely. Or, there may be a limit on what you can withdraw without penalties.
 
Traditional pension plans may be adversely impacted by retiring early. One reason is that the accrual of benefits under such a plan is generally the greatest during the final few years before retirement, which in most cases are the highest-earning years. As a result, early retirement can result in considerably lower monthly retirement benefits from such a plan. On the other hand, employers sometimes sweeten early retirement packages, increasing your pension benefit beyond what you’ve earned by adding years to your age, length of service, or both, or by subsidizing your early retirement benefit or your qualified joint and survivor annuity option. These types of pension sweeteners are key features to look for in your employer’s offers, especially if a reduced pension won’t give you enough income.
 
Also, taxable distributions from employer-sponsored retirement plans are generally subject to the 10 percent premature distribution tax if made before age 59 ½. However, there are some exceptions to this rule.
 
Finally, if you’re retiring early and plan on using your IRAs or retirement plans as a source of income, you should understand that you run the risk of depleting or at least considerably reducing such accounts. The reason is obvious: You have more years of retirement to fund than if you had waited to retire. Depending on how early you actually retire, you may find that you’re going through those retirement accounts more quickly than you had originally intended. This could pose a problem both for your later retirement years when you need income the most and for your plans to leave your beneficiaries with an inheritance. However, the possibility of deleting your retirement accounts may not be a major concern if you have no beneficiaries or if you have other income sources (such as job earnings or other investment assets) that will carry you through a lengthy retirement. But you should at least be aware of the risk.
  
Severance payments
 
Severance payments are usually based on your salary and the number of years you have worked for the company. Severance payments can be distributed in either a lump sum or over the course of several years. A severance payment can provide you with a stream of income during your transition from one job to another. However, if you take another job soon after receiving the severance payment, it can put you into a higher tax bracket for the year.
 
Post-retirement medical coverage
 
Because of the high cost of medical care, you might find it hard to turn down an early retirement package that includes post-retirement medical coverage. These packages usually provide medical coverage until you reach age 65 and become eligible to receive Medicare.
 
Such post-retirement medical coverage is an important component to look for in an early retirement package. Without it, you will be forced to look into alternative sources of health insurance, such as COBRA or private health insurance to carry you through to the Medicare eligibility age. Unfortunately, COBRA provides only temporary benefits (up to a maximum of 18 or in some cases 36 months). And private health insurance premiums can be quite expensive, depending on such factors as your age and present health status. You also may shop for and purchase an individual health insurance policy through either a state-based or federal health insurance Exchange Marketplace.
 
So think carefully before accepting a package that doesn’t include post-retirement medical coverage, especially if you have several years or more until you reach Medicare eligibility age. However, don’t make the mistake of assuming that all your health insurance needs will be met when you turn 65 and become covered under Medicare. The coverage provided by Medicare has gaps and often needs to be supplemented with a private individual policy and/or your own funds (“self-insure”). An early retirement package that provides medical coverage (full or reduced) well past the age of 65 (as some do) can be much more attractive than a package with coverage that ends at 65. You can sometimes negotiate for this extended medical coverage to sweeten the pot for yourself. Employers who feel strongly about having their offer accepted may very well agree to these terms.
 
Can you afford early retirement? Whether you have the financial resources to retire early depends on how much you expect to have in retirement income, and how much you plan to spend after you retire. Your early retirement income will include your early retirement package (severance payments and retirement benefits), Social Security (if you receive benefits before the normal retirement age), IRAs and employer-sponsored retirement plans, other savings and investments, and wages (if you work after early retirement). To determine how much you will spend, you must estimate your annual living expenses for early retirement. It is important to note that your annual living expenses during early retirement may differ from your expenses later in retirement. During early retirement, for example, you may find yourself still paying a mortgage, funding your children’s education, or paying for medical coverage. If so, you may be free of these expenses during your later retirement years.
 
If we can help in any way with this or anything else related to retirement don’t hesitate to contact us.
 
Best regards,
 
Jeff Christian CFP, CRPC

A man can succeed at almost anything for which he has unlimited enthusiasm.

Charles Schwab

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