If you are offered a retirement buyout, make no mistake. It is one of the most important financial decisions you will ever make.
The economy is in crisis. The major investment banks are facing financial failure; tens of thousands of jobs will be lost on Wall Street alone. According to the Bureau of Labor Statistics, 438,000 jobs in all sectors of the economy have been lost already in 2008 with at least 60,000 more to come in the financial sector. The unemployment rate is 6.1% in mid-year 2008. To survive, firms are looking to cut their payroll budgets and reduce their workforces. One way is to offer employees nearing retirement an early way out. A retirement buyout is a popular way to do this.
The Retirement Buyout
A retirement buyout generally has two parts. The first is a severance package, which is some pre-determined pay for each year you have spent with the company; the second is a better pension than you would get if you stayed with the company longer or until your retirement date.
If you are 55 or older and have been with the firm for 25 years or so, you are likely to find, when you run the numbers, that working a few more years will not make that much difference in the value of your actual pension. This is particularly true if your pension is bumped up by the firm to tempt you to retire. If you get a severance package that involves pay for time spent with the firm, that sweetens the deal since you will have the money now instead of later which means you can invest it and earn interest. However, there are other considerations.
Other Early Retirement Considerations
If you are not old enough (62) to start collecting Social Security, you will have at least a few years where your contribution to the program will be low or zero. This will lower your social security benefit when you do start receiving your benefit since your annuity is an average of what you pay into social security.
If your company does not sponsor a health insurance plan for retirees, you may be looking at very high health insurance premiums through a private company after retirement. Sometimes, you can keep your health insurance for awhile after you retire through a program called COBRA, but then you will have to deal with private health care costs which will lower your monthly retirement income significantly.
A healthy savings nest egg makes the prospect of early retirement seem far more secure. If you are retiring before the age where you can withdraw your savings, this should be a consideration. If you do not have a nest egg, that is also a consideration.
If Your Company’s Future Is Questionable
Another consideration is why your employer is offering a retirement buyout. Is it because they are in financial trouble? Are they contemplating layoffs? Is your head on the chopping block? If your company’s situation is serious, then the early retirement decision is essentially made for you. You may be lucky to get a buyout offer. It may be time to take the money and run.
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