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You’ve Received an Early Retirement Package – Now What?

Marcus by Goldman Sachs is excited to share this insight from our friends at 
Goldman Sachs Personal Financial Management.

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By Stacy Paradise, Vice President, Goldman Sachs Personal Financial Management

In the midst of a recession brought on by COVID-19, many companies have seen decreased revenues and have been reducing their expenses as a response to the economic downturn.  Companies can sometimes choose to cut costs by reducing employee work hours, creating furlough days, or laying off workers. 

Another way companies may reduce overhead costs is by offering early retirement packages to employees who are nearing retirement. These packages (sometimes also referred to as a voluntary severance or separation package) are usually offered as an incentive to encourage certain employees to retire early. 

If you’ve received an early retirement package, it’s important that you understand the details of the offer and its potential impact on your retirement plan. While an offer to retire early may seem tempting up front, retiring before you’re financially ready to do so can have serious consequences. 

With the amount of financial education resources available online these days (e.g., articles, podcasts, etc.), it’s possible that you might feel you can take a “DIY” approach and assess your retirement readiness on your own. However, if you’re not familiar with the complexities of retirement planning, you may not know what questions to ask, factors to weigh, or pitfalls to look out for. 

That’s why when it comes to evaluating an early retirement package, it’s a good idea to work with your professional financial, tax and legal advisors, who have the knowledge and experience to guide you through the retirement phase of your life. 

Read on to learn more about early retirement packages and how a financial advisor can help you think through some of the key questions and factors you may want to consider before accepting or declining an early retirement package offer. 

What’s in an early retirement package?

The details of an early retirement package can vary greatly from person to person and from company to company. Typically, the package may include information about severance payments, post-retirement insurance coverage and other benefits (e.g., stock options and transition pay).

  • Severance payments. The amount of your severance usually depends on your salary, years of employment and position at the company. Sometimes this payment may also include any unused sick or holiday leave that you’ve accrued. 
  • Insurance coverage. Some companies may offer to continue certain insurance coverages such as health care, life or disability for a set period of time. For instance, a retirement package may offer to provide health care coverage until you’re eligible for Medicare.

Whatever your specific offer may include, generally speaking, you have the option to accept or decline it (sometimes you may also be able to negotiate the details of the package). Before making a decision, however, it’s important to understand how accepting or not accepting the offer may impact your retirement plan. 

Here are some factors that you may want to take into consideration:

  • Your age
  • Your accumulated savings 
  • Your sources of retirement income (e.g., Social Security, pensions, IRAs, etc.)
  • Your health insurance needs
  • Consequences of accepting the offer

These considerations can be incredibly complex, so it’s important not to rush your decision. If you don’t have a financial advisor, you may want to find a professional who can help you evaluate an early retirement package and see whether it aligns with your retirement needs and goals.

Some questions to consider when evaluating an early retirement package

To determine whether an early retirement offer is right for your financial future, you need to know how to ask the right questions. When working with a financial advisor, you may want to start with some of these basic questions. 

Can I afford to retire early?

This is where your financial planner can sit down with you to identify the sources of your retirement income. If you’ve planned appropriately, you should have several sources in place. 

These may include your pension, 401(k), IRAs, or Social Security benefits. Be aware that each source of income usually comes with different rules and tax ramifications, which you and your advisors should take into consideration as you evaluate your overall retirement readiness. 

As you review your income streams with your advisor, you may also want to ask the following questions to get a better picture of your retirement assets. 

  • Are your investment accounts appropriately diversified and rebalanced?
  • Does your retirement plan account for inflation? 
  • Have you done a “stress test” on your financial plan to see how it can withstand market volatility?

The point of these questions is to make sure that your financial plan is not exposed to more risk than you’re comfortable with as you near retirement.

Will retiring early hurt my retirement plan down the road?

You’ve worked hard to build your retirement nest egg, and the last thing you’d want is to find yourself running out of money in the middle of your golden years. 

This is why it’s important to understand how the timing of your retirement could have a significant impact on your overall financial plan. You can learn more about retirement-timing risks, such as sequence-of-returns, when you go over your retirement plan with your financial advisor. 

They can walk you through a few scenarios to demonstrate how retiring early (and during an economic downturn) might affect the value of your retirement assets and their ability to generate sufficient growth over time. 

How much do I need for health care and long-term care? 

People are living longer, and the cost of medical and long-term care is likely going to continue to grow over time. These costs could easily become one of the largest expenses during retirement. And the lack of planning to cover health care and long-term care needs can put a significant strain on your retirement savings. 

When evaluating your early retirement package, ask yourself: Does the package include sufficient insurance coverage? If not, can you afford to fill in the gaps without having to become dependent on your family? 

In addition to health care, you may also want to take a look at your life insurance policy with your financial advisor. When was the last time you did an assessment? The goal here is to make sure that your loved ones will be taken care of financially if something unexpected were to happen to you. 

Deciding what to do with an offer

When you’re offered an early retirement package, you may be given the option to accept, decline or negotiate the offer.

This decision is a personal one. What you choose to do will depend, in part, on your conversation with your financial advisor as you work together to assess your retirement readiness. 

If you’re not ready to call it quits just yet, you may have the option to decline the company’s offer and stay in your job, depending on your company’s financial situation. Staying put allows you to continue to earn income and build your retirement nest egg. 

On the other hand, there are also some potential risks to rejecting an offer. It’s hard to know for sure whether you’ll be able to keep your job until you’re ready to retire. Remember, many companies offer these packages as a way to reduce their payroll costs. So you run the risk of being laid off down the road anyway – only without a severance package in hand. 

The bottom line

Getting an early retirement package offer is a curveball for many people, especially ones who love their jobs and aren’t quite ready to retire just yet. There is a number of factors that need to be taken into account when evaluating an offer, so it’s important not to rush your decision. 

Remember, determining the best course of action isn’t something you have to do on your own. Working with a financial advisor can help to ensure that you’re making an informed and empowered decision for you and your financial future.

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United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization.

The information contained herein is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. GS PFM does not provide legal, tax, or accounting advice. Clients should obtain their own independent legal, tax, or accounting advice based on their particular circumstances. Please contact your financial adviser with questions about your specific needs and circumstances.

Information and opinions expressed by individuals other than GS PFM employees do not necessarily reflect the view of GS PFM. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.

Marcus by Goldman Sachs is a brand of Goldman Sachs Bank USA, which is an affiliate of United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management