How to Evaluate an Early Retirement Program

The recession and a general decline in corporate profitability have created boom times for those who want to drop out of the work force a few years before their time. Nearly everywhere you look there’s some company offering an early retirement program for executives or blue-collar workers.

In industry parlance, these early retirement offers are called “window programs”--as in “window of opportunity” or “jump out a window.”

And, depending on the individual and the program, either analogy can be apt. Some early retirees are happy and financially secure. Others end up miserable and broke.

Which category you land in can depend on how well you evaluate your company’s early retirement offer. Since these offers come in great variety--and because part of the evaluation hinges on your personal circumstances--that’s not easy to do. Many experts suggest that you consult a professional immediately to help you run through the numbers and determine the tax implications of any decisions you make.

You need to consider several factors when evaluating these offers, including your age and health, Social Security, your savings and your company pension. You should also find out whether you will retain certain valuable company-paid benefits after you retire.

Typically, early retirement plans include a boosted pension and a severance program that’s often based on length of service and job title.

Commonly, companies will add one to five years to an early retiree’s length of service, which has the effect of slightly boosting monthly pension benefits. However, it is unlikely that your monthly payments will be as high when retiring early as they would have been if you waited until your normal retirement date--unless, of course, you were very close to retirement anyway. A first step in evaluating any offer is to look at the disparity and determine whether you can live with it.

You also need to know whether the company will continue to pay for certain benefits such as life and health insurance. If it won’t, you need to price comparable coverage.

Often, workers are covered under group health plans that are sold at discount rates and that don’t require annual physical examinations. However, if you are shopping for coverage on your own, you probably won’t get the same deal.

In addition, many health policies exclude coverage for pre-existing conditions, which can include such common ailments as high blood pressure. It is important to investigate the insurance coverage carefully because this item alone can ruin the economic viability of an early retirement offer--especially for those who are not in top physical condition.

You also need to consider your Social Security benefits. If you collect Social Security before age 65, your monthly benefits will be reduced. How much they will be cut will depend on exactly when you start collecting them and how many years you were working. If you collect benefits when you turn 62, for example, your monthly checks will be about 20% less than they would have been had you waited until age 65.

The amount you will be entitled to may also be diminished by taking early retirement. Here’s why. Social Security benefits are based on your average earnings over 35 years. (The Social Security Administration looks at the last 40 years of income, but it throws out the five lowest-paid years when determining benefits.) You must work at least 10 years to qualify for Social Security payments.

If you have only worked 30 years before retiring, your average wages will include five years of zero earnings, said Scott Rose of the Social Security Administration. In addition, your lowest paid years will figure into the calculation. Because individuals tend to earn a bit more each year, every year you work in addition to the first 35 boosts your average wages.

If you want to find out exactly how much your Social Security benefits will be, visit a Social Security office and ask them for a personalized earnings and benefit statement. They can give you this estimate while you wait.

You can also get this information in writing by filing out an SSA-7004 form and sending it in. However, this option can take four to six weeks.

Once you know what your monthly pension and Social Security benefits will be, you should look at your monthly expenses and other sources of income. That should allow you to determine whether your retirement income will provide you with enough to pay your bills and a bit of a cushion for unexpected expenses.

Some companies may allow early retirees to buy company cars and computers at discounted rates as well. This is a nice perk, but don’t let it distract you from the main issue, which is whether your monthly income will allow you to live comfortably.

Last, you need to consider your personal lifestyle and goals. Are you ready to drop out of the work force? Do you have hobbies and interests to keep you busy and amused? Some individuals think that retirement sounds great, but the theory is better than the practice. If you have lots of outside interests and enough money to pursue them, early retirement may be just the ticket. If you don’t, you probably won’t develop these interests now.