Perhaps you weren't planning to retire early. But then your employer springs a buyout offer that would have you packing up in a hurry.
You need to take a very sharp pencil to the deal, and remember to factor in both your other financial resources and your expected retirement expenses.
Severance is a cash payment that's supposed to compensate for regular income you lose when you take a buyout. Kevin Yeanoplos, a financial planner in Tucson, says you should compare today's severance with what you would earn by staying and collecting your usual raises.
Here's how that works: Suppose you earn $200,000 a year, get a 3% salary increase each year, and plan to retire in five years. That comes to $1,062,000. Now you're offered $400,000 to leave immediately. Assuming a 7% return on the $400,000, that comes to $540,000, or a little more than half of what you'd get by staying (before taxes). Is that a good enough deal? After all, you don't have to go to work for the next five years.
Severance pay is taxable, so if you take all the money at once, you'll have to pay taxes on the severance and the salary you've earned in that year. That could easily push you into a higher tax bracket. If the severance is large relative to your salary, negotiate to get the company to pay it out over at least two tax years.
If you have a defined benefit plan, your company may give you credit for extra years worked to boost the pension or speed up its effective date. Base your decision about the offer not only on the size of your pension check but also on whether you think that, if you stay on the job, the company will be financially secure enough to pay out the pension when you retire.
Sometimes you can arrange for a lump sum in lieu of a monthly payout. When Joe Griffin, 60, took an early buyout from his job as a communications technician for AT&T (T) in Charlotte, N.C., in 1999, he chose to forgo a $1,500-a-month pension for life. Financial planner Joel Larsen, now of Davis, Calif., helped Griffin figure out what to do.
"I could have had a steady check for the rest of my life, but with inflation, it wouldn't have amounted to much" in future years, Griffin says. His nest egg took some lumps in the bear market, but Griffin was able to recoup and now feels confident that he made the right choice.
Employers are not required to offer you subsidized health insurance—and if they do, they can cut it off as long as they give notice, usually 60 days. Paying for your own coverage for several years, at least until you qualify for Medicare at 65, could be pricey. If the company has more than 20 employees, you should qualify for COBRA, which allows you to continue your coverage for 18 months, but you may have to pay up to 102% of the cost.
As a condition of the buyout, companies often ask employees to sign a waiver forfeiting their right to sue. If you think you've been the victim of age, race, or sex discrimination, you may not want to sign, even if you risk losing the buyout. Consult with an attorney.
John Challenger, chief executive of the Chicago-based Challenger, Gray & Christmas outplacement company, says that most early retirement packages are "take it or leave it." But of course you can try to negotiate for better terms. "The smaller the layoff or buyout, the more leverage you have," he says.
High-level executives may have employment agreements providing cars or housing, insurance, and stock options or grants that require complex negotiations in the event of an unforeseen early retirement offer.
There are several ideal outcomes in this whole process. You could find another job right away and get paid twice—by your new employer and your old one. Or maybe the offer is just the incentive you need to walk away and start the next phase of your life.
By Ellen Hoffman