You thought you had years until you’d have to make these decisions. But suddenly, you’re at a crossroads you didn’t expect—and your choices will set the stage for the next 30 years of your life.
Perhaps you’ve been offered a retirement buyout. It’s tempting, but is it the best deal for you? Will the package compromise your plans down the road? What do you need to know to make the best decision?
Maybe you were dedicated to your career for years and years … until now. You’re not sure if the hours are worth it anymore, but you don’t know if early retirement is right. Would it be better in the long term if you continued until full retirement age, making personal sacrifices to do so?
Here are some critical questions to ask when faced with this situation.
Do I have enough money to retire?
You’ve brought in a regular income and made wise investments throughout your life. Now you’re facing the transition from generating income to drawing down your savings. Many people in your situation consider taking another job. But it can be hard to find another position that rewards your experience and work ethic.
If you’re too young to claim Social Security, you must create a plan to bridge the income gap until you reach claiming age. If you’re under the age of 59½, you may face penalties for drawing down retirement accounts (on top of the potential tax bill you’ll owe).
Even if you have enough cash to avoid drawing on your investments, you may still want to adjust your investment mix. When your portfolio is the foundation of your retirement lifestyle, it’s vital to prepare for bear markets and recessions.
Critical planning questions to ask:
- Where will my income come from if I retire?
- How will I change my portfolio to have the right mix of investments?
- Will I face penalties and taxes by starting distributions now?
- How confident am I that my portfolio can withstand a recession?
- Should I ask for advice from someone who has experience in these situations?
Will I be able to sustain my current lifestyle?
Suppose you’re in the position of being able to choose early retirement instead of having it thrust upon you. The cost of quitting or taking a buyout package may be evident in that case. Evaluating the tradeoffs between a work-free life you enjoy and the cost of cutting back on expenses is essential.
Developing an understanding of your income and expenses now will help avoid problems later. If you adjust quickly enough, you may have a better chance of a comfortable early retirement.
Critical planning questions to ask:
- What are my annual expenses?
- What expenses will vanish when I’m not working?
- Is what I’ve accumulated so far enough to cover my lifestyle?
- Will I need to take another job?
What must I know about health care when my employer plan no longer covers my family and me?
Aside from your employer, you may be eligible for coverage through state exchanges or COBRA. Right now, it might need to be clarified how extensive or expensive these alternatives are, though they will likely cost more than your employer coverage.
Without careful planning, health care and related costs can wreck your financial plan. You’re generally not eligible for Medicare until age 65, and even then, you may face extra costs for supplemental insurance and long-term care.
If you were offered a retirement buyout, your employer might provide health care coverage for some time after you leave. You’ll need to determine if it’s enough to cover you until you reach Medicare eligibility.
Critical planning questions to ask:
- What happens to my healthcare when I leave my employer?
- Do I have a plan to cover the health needs of my family?
- Is long-term care insurance appropriate for me?
How do I evaluate my early retirement package?
You may be tempted to take the money and run—but you’ll want to be sure your decision won’t blow up in your face later. The package must provide enough funding and benefits to allow your savings and investments to last through retirement.
The viability of the package is independent of the lump sum payment typically offered. Benefits that work for someone five years away from being able to claim Social Security might not be suitable for someone ten years away.
Your job prospects are another factor in the decision. If you already have employment offers, a retirement package from your current employer could be a no-brainer. But the package may only be enough to finance your exit if you do.
You also need to consider your current employer’s financial health and ongoing prospects. If you don’t take the early retirement package, the next bombshell could be a pink slip. And if the company isn’t in good financial shape, it may be unable to pay everything it owes you when you need it.
Critical planning questions to ask:
- What tradeoffs will I make by taking or rejecting the buyout offer?
- Do I feel reasonably sure I’ll be able to find another job right away, and do I want to?
- Will this package be enough to finance my early retirement?
You’ll probably have limited time to make these critical decisions. Still, you’ll want to include all critical factors from the analysis.
If you are facing these decisions or know someone in this situation, meeting with a retirement expert is an excellent place to start. We can determine if early retirement is right from a financial perspective and review other critical factors to help you decide. Seeking advice is the first step toward making wise choices and understanding the consequences of your decisions.
Insights:
- You will need an income bridge if you take early retirement before your claiming age for Social Security.
- Create a spending plan to evaluate income and expenses before you leave the workforce.
- Health care and related costs could wreck your financial plan. Check your eligibility to get coverage through state exchanges or COBRA.
