Look Before Leaping at Early Retirement Offers

As the economy worsens and more companies are forced to slash jobs, expect more workers to be offered early retirement incentives. If you’re among them, be sure you carefully consider your options before accepting such an offer.

Early retirement plans are used increasingly by companies as a more humane--and potentially less litigious--way to cut costs and reduce payrolls.

In one of the most common types of early retirement offers, your employer will adjust its basic pension formula to give you a higher benefit than you would otherwise get if you retired now. Pension plans normally penalize workers for retiring early; for example, you might lose 5% of your monthly benefit for each year you retired before the plan’s normal retirement age, usually 65. But the early retirement incentive plan might eliminate this penalty. That could boost your pension considerably.

In another common type of early retirement incentive plan, you might be granted bonus years toward the calculation of your pension benefits. Pension benefits are typically based on your years of service at which you retire. An incentive plan might add, say, three years to your length of service.

Other early retirement incentive plans might award you a lump-sum severance payment--say, six months’ or one year’s pay. Or you might get two weeks’ pay for each year of service.

Companies may also offer to pay you what you would get from Social Security once you became eligible at age 62.

In yet another option--and one that has become more popular among workers--employers will offer to continue subsidizing part of your group health insurance premiums, at least until you reach age 65, when Medicare kicks in, or even longer. Employers already must allow departing employees to retain group health coverage at the employees’ expense for at least 18 months after leaving.

“Employees today are as much or more concerned about their medical benefits than their retirement benefits,” says Duane C. Bollert, partner and manager of the Los Angeles office of Hewitt Associates. He notes that private health insurance for people just under age 65 can be quite expensive.

But although early retirement offers may initially seem lucrative, they may not be as attractive under more careful scrutiny.

Here are some key questions to ask when considering an early retirement offer:

* What will happen if you reject the offer?

If you stayed on, might you be involuntarily laid off in a few years anyway--without any early retirement sweeteners? To answer that, you should assess the financial shape of your company.

* How does the package compare to what you would get if you continued working?

If you retire early, you will no longer receive employer contributions to your 401(k) and other retirement savings plans. That loss can have a substantial impact on your retirement nest egg.

You also may earn much higher pension benefits if you continue working. That’s because benefits usually are calculated on years of service and the average of what you earned in your most recent three to five years.

Also, once you retire, your pension benefits are usually set. Most companies don’t adjust them for inflation, Bollert says.

And if you have to draw on cash in your individual retirement account or 401(k) plan, you may have to pay a 10% early withdrawal penalty tax if you are under age 59 1/2. And you’ll have to pay income tax on the amount regardless of your age.

To analyze the various financial implications, consider having a financial planner, accountant or other trusted financial adviser review the early retirement offer.

* Can you afford to retire early?

Will the early retirement benefits, plus income and assets from other sources, support the standard of living you desire at retirement? Accordingly, some financial advisers suggest, figure on needing at least 100% of the income you earn in your final year of work to maintain the same lifestyle in retirement. You can add in other income from investments and Social Security. But you’ll also need to factor in the impact of inflation and ask whether your income can keep up.

* Are you emotionally prepared to quit working?

If you want to accept the early retirement offer but still wish to work, how easily can you find another job? The older you are, the harder it may be.