While early retirement might sound appealing, if you weren’t planning on it, it could leave a huge gap in your savings and investments and thus impact the income you have to live out your retirement.
If your company offers you early retirement, what should you do before you make that big decision?
Read on to learn our insight!
Questions to Ask Yourself Before Taking Early Retirement
If you’re offered early retirement, don’t panic. Instead, come up with a game plan. Whether you work with a financial advisor or do your own planning, it’s critical to consider everything you need to do before accepting early retirement.
Your number one consideration should be:
Can I afford to stop working completely?
To find this answer, look at your cash, income, and expenses. Then, compare them to what your buyout is going to be and do an analysis to see if you will have enough money without working.
If you’re short on money, you could then figure out potential ways to make it work, like going back to work part-time or by doing consulting work here and there.
You should also consider where you’re going to stay or live. Are you going to move somewhere else? Are you going to stay in your current home?
What will your day to day look like? Will your spouse retire at the same time as you or keep working?
These questions will help you to start envisioning your retired life and how it will play out. This will make it easier to do the number-crunching to make sure that everything ultimately lines up.
During all of this, we encourage you to try and turn this potentially scary time into a positive one. Your attitude can be incredibly beneficial when it comes to planning your retirement. In fact, studies have found that if you have a financial plan, your retirement will be more successful. It sounds pretty simple, but, believe it or not, many people don’t have a game plan or strategy for their retirement and instead just go day by day — which can get you into trouble.
Your Early Retirement Package
If you’re lucky enough to be offered a retirement package, there are a few things we encourage you to consider so that you can maximize what you’re getting.
Some packages will just give you a lump sum while others will offer deferred payments. Before taking either of these packages, calculate it and put it into your retirement plan to see if it’s going to work for you.
For example, while most people look to take the lump sum, if the payout is large and you’re going to get hit with a lot of taxes — and you’re comfortable with the company’s stability — you may want to consider taking the deferred payments.
Other Benefits to Consider
Before taking early retirement, there are a number of other benefits to consider and revisit. The number one thing you should take a look at is your health insurance.
Some companies offer lifetime health insurance for retirees. If you’re one of the people who receive this, will you still be eligible if you take that early retirement? If not, do you go on COBRA, in which you can purchase the same coverage that you have now, or do you have to get your own insurance? Are you eligible for Medicaid yet?
And while your work insurance likely covers your whole family, Medicare will only cover you as an individual. Do you need additional coverage for your loved ones?
These are all questions to ask yourself and to look at as a part of your retirement package. Insurance and healthcare can be a big cost, especially if you’re not eligible for Medicaid.
We also suggest looking at your employer-sponsored life insurance. Even if you’re leaving your company, you still need life insurance coverage. Can you take your insurance with you? Can you convert that over to your own insurance?
If you are going to need insurance and you can’t take what you currently have with you, what are the costs, and what is your eligibility? Are you going to be able to get some of these insurances yourself?
When it comes to your insurance and early retirement, you want to be careful and to look at all your benefits again, Make sure you have a game plan and know how you’re going to put this early retirement in place so that you and your retirement are as protected as possible.
Other Benefits to Negotiate
Another benefit to look at is your company stock options. This is important because your options could have future vesting dates, and as far as you know, you could be only a week or two from those vesting dates.
A lot of times, if you leave the company, you forfeit those options. So, look at your options, see what happens if you leave the company, and look at the dates associated with them to see what will work best for you.
If your company has some type of pension plan, there might also be a way of negotiating what you’re getting to maximize what you’re taking home. In times like these, it might be a little bit more difficult to negotiate, but it’s definitely worth looking at all the options you have and seeing what they will do for you.
Your 401(k) or Company Retirement Plans
If you have more than $5,000 in a company retirement plan, you do not have to take it out when you leave the company. When it comes to your 401(k), while you can keep it with the company as long as you want, you can no longer add to it or borrow from it.
Some 401(k) plans have some stable value funds that have minimum interest rates of 3%. Right now, interest rates are much lower than this. So, if you’re lucky enough to have these funds, you might want to do your best to make sure you don’t give that up.
However, if your plan is not as good as you’d like, another option is to roll that plan over into an IRA to manage it yourself.
When it comes to Social Security, there are plenty of variables to consider when entering early retirement. For example:
Should you start taking it?
Should you defer it?
Should you take it at normal retirement age — or before or after?
Do you need it now?
Are you married?
If so, how much does your spouse make?
Many people believe that they take their Social Security as soon as they retire because that’s what it’s there for. However, this is not the right answer. The right answer is that you need to do an analysis to see what is best for you and your circumstances so that you can maximize your benefits where possible.
When it comes to early retirement, whether it’s planned or not, there are a lot of different things you can do. No matter which way you choose to go with your retirement, it’s crucial that you have a game plan.So, when the time comes for early retirement, be sure to do your due diligence and put your plan together. If you’d like help or guidance putting together your early retirement, feel free to contact us at (631) 293-2806 or by using our contact us page.