My employer just offered me an early retirement package, what do I do?August 17, 2020 1:15 pm
Last week Brown University announced they would be offering an early retirement package to some of their staff. Dubbed the “Staff Voluntary Retirement Program”, Brown is clearly hoping to reduce payroll during a challenging time due to COVID. Brown University is the #8 employer in the state, so this could potentially affect a lot of employees. We’ve been seeing more of these early retirement packages being offered to folks over the past few years, and we fully expect that as COVID drags on, and the full economic impact is felt by companies, that we will see more and more of these offers.
As with any major life decision there’s a lot of things to analyze when your employer offers you an early retirement offer. The more incentives your employer offers you to leave, the harder it is sometimes to think rationally about the decision. We highly recommend folks meet with a trusted advisor who will provide an impartial assessment about the offer. If you are an affected Brown University employee or know someone who is, we’re happy to offer a complimentary meeting (either virtually or in person) to help analyze the offer. Please contact us at firstname.lastname@example.org to arrange a meeting!
You’ve been presented an early retirement package, now what?
• Incentives? Early retirement packages almost always come with some financial incentive to try and get folks to accept the offer. In the case of Brown University, employees will be allowed to retire in 2020, but then receive an additional full year of salary as compensation for taking the package. Brown’s offer seems to be unique in that every employee will receive the same severance, regardless of the amount of time they have worked for Brown. Typically, a severance package will be tied to length of service, but as you can see, the company can choose to offer whatever it wants. As you will see, compensation is just one piece of the offer that you should analyze, in fact compensation may not be the most important variable.
Occasionally employers will offer the employee the option to receive their severance as a lump sum option or to continue to receive their pay in typical payroll fashion. There are pros and cons to each choice, and there could also be potential tax pitfalls. We strongly suggest you speak with your trusted tax advisor and financial advisor before you make a decision.
• Health Care Coverage? Whenever we meet with folks who need help analyzing their package, health care coverage is typically one of the biggest variables that will make people lean one way or the other. Quite often the company will offer to keep the employee on the health care plan, but you must pay the full cost out of pocket. If you are too young to qualify for Medicare, you need to analyze other options before accepting their offer. Perhaps the marketplace in your state offered by the Affordable Care Act is a cheaper sufficient alternative. Whatever you choose to continue your health care coverage, it is important to realize this is an additional expense, and the cost should be factored in as you analyze the incentives the company offered you.
If you are currently enrolled in a Flexible Spending Account or a Health Savings Account, be sure to know what your options are with these accounts in terms of spending and additional funding. Also please be aware that if you elect to use COBRA for your healthcare coverage, you can use your HSA funds to pay for this. However, if you decide to receive healthcare coverage from a state-sponsored marketplace you can NOT use HSA funds to pay for the benefits. While this makes no sense, it is currently the law.
• Pension? Typically, your pension benefits are based on a calculation that includes your years of service, age and final salary. It is extremely important to know what happens to that pension, and the formula, should you decide to take their offer. You may find that some of the incentives for an employee to take the early retirement are embedded in how they treat your pension.
• 401k/403b? It is important to make sure you receive all the benefits that you’re entitled to in your retirement plan. If your company only makes an annual match, depending on when you accept the offer, you may be entitled to a prorated match, so it is important to find out in writing what the company intends to do. If there is a profit-sharing component, you should also understand if you are still entitled to receive any additional contributions. Sometimes folks will be eager to move their 401k account after their employment has ended. Be sure to remain cognizant of the timing of any future employer contributions before moving your retirement account.
Bonus item to consider: if you have a sufficient emergency fund and have yet to max out your 401k/403b when the offer arrives, you should ask if there’s any way to max out your full year contribution before you leave. This may also help reduce the taxes due on the severance, especially if you are receiving a lump sum.
• Unemployment? The ability to receive unemployment benefits will vary based on your specific situation, especially if your departure was not voluntary. Best to ask your HR rep, in writing, for their input on your ability to receive unemployment. If the answer is not satisfactory, you should then contact your local unemployment office.
• Sick days and Vacation days? Be sure to ask your employer how they will treat these benefits. Accrued vacation days will sometimes be tacked on to the severance package. As with all of these items, it is important to get the answer in writing to ensure you receive everything you are entitled to.
• Social Security? Accepting an early retirement offer does not impact your ability to apply for social security. However if you are on the younger side, please be aware that the estimated payments that the social security office gives you are based on the assumption that you continue to earn the same salary through your full age of retirement. Choosing to retire early, even if you do not file for social security, could negatively impact the amount you may ultimately receive.
As with any retiree, you should analyze the implications of taking social security within the entire scope of your retirement goals. StrategicPoint can always help you with this analysis, feel free to click here to schedule a meeting.
• Career Counseling? Typically these services are not offered with an “early retirement package.” However, if your employer is offering younger employees a buyout as part of a broader program, you should see if they offer counseling. If the company is not offering career counseling, there will be local outplacement firms that can help you with the transition.
• Can I negotiate the terms of my retirement package? You may in fact be able to negotiate certain terms of your package, with respect to some of the above variables. Employers may be willing to negotiate certain areas more than others, so be prepared to receive counter offers. In our experience, voluntary offers like the one Brown University is offering to a potentially large group of folks does not come with much, if any, ability to negotiate.
• What if I say no? In my experience, this is the second most discussed topic and the one most fraught with fear. Will your job change if you reject the offer? Will you now have more responsibility with less compensation? What will the morale of your fellow employees be and how could that affect your work environment? What if this is the best offer I am going to get? What if the company does not get enough people to accept the offer, will the company have to take more drastic measures?
The reality is it will be almost impossible to ascertain with complete confidence the answers to any of these questions. Ultimately you will have to make a judgement call, and you should consider the health of the company as part of that analysis. With all of the government assistance during COVID, it is possible that some companies have still yet to feel the full effect of the economic fallout of the pandemic. The reality is it is possible that turning down the offer may just be delaying the inevitable.
Deciding to take an early retirement package can be an extremely stressful decision, and it can be an emotionally charged one. Most folks want to have control over when their careers will end, and the sudden realization that a decision on the package must be made in 60 days can be a shot to our egos. With so many potential variables to consider before accepting the offer, and the emotions of being thrust into this position we strongly suggest folks find someone they trust who can analyze the offer. As we said before, if you or someone you know has been recently received an early retirement offer please feel free to contact StrategicPoint to setup a complimentary meeting with one of our advisors!
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.