It can be enticing when your employer dangles an early-retirement package compelling enough to grab it and not look back.
Frankly, as someone who writes about work and money for people over 50, I’m worried that frustration with the job search or eagerness to grab early-out offers are triggering people to retire early, with potential financial reverberations for the rest of their lives.
The Risk of Claiming Social Security Early
Take Social Security — or rather, maybe don’t.
Due to the heightened unemployment of the Great Recession, “the take-up of Social Security at age 62 jumped from 42.2% in 2007 to 46.9% in 2009,” Alicia H. Munnell, director of the Center for Retirement Research at Boston College, wrote on MarketWatch. And, she added, “I would expect this pattern to repeat itself in the wake of COVID-19.”
Here’s why that’s a concern: Starting to claim Social Security at 62 because you aren’t working will then lock you into a level of much smaller benefits than if you’d waited until later. “Benefits claimed at 70 are 77% higher than those claimed at 62,” Munnell wrote.
“If you qualify for the maximum amount of Social Security and take your benefits at the youngest allowed age, you will receive $2,252 each month,” says Michelle Connell, a Chartered Financial Analyst and owner of Portia Capital Management in Dallas. “If you wait until you are 70, you will receive $3,980 a month.”
Those Enticing Early Retirement Offers
Undoubtedly, it can be enticing when your employer dangles an early-retirement package compelling enough to grab it and not look back.
A growing number of companies from airlines to media firms have been making these offers due to the pandemic. According to CNBC, nearly 4,000 Southwest Airlines workers and 2,235 Delta pilots signed up for buyouts. Delta offered partial pay for up to three years plus extended health insurance coverage.
A spokesman for the Air Line Pilots Association told CNBC: “The voluntary early-out program participation exceeded our expectations.”
Such offers might not come around again anytime soon and there is no guarantee your job will be safe.
Don’t expect your company to follow it with another severance package for future rounds of layoffs, notes Connell.
It’s logical to me that older workers, especially those in spitting distance of age 65, would decide to bid employment adieu. Medicare kicks in at 65 and full Social Security benefit eligibility starts at 66 or 67.
Whatever the impetus, the decision to retire is often emotional and fraught with myriad calculations. It’s generally not a solo decision if you have a spouse or partner or minor children.
Money Advice for the Early Retirement Decision
Here’s how to help shape a financial framework if you’re contemplating early retirement:
Prepare a budget. Retiring early “can be a difficult decision, since there are so many unknowns to consider,” says Charles Adi, a Certified Financial Planner at the advisory firm Blueprint 360 in Houston. “I encourage my clients to take some time and evaluate the three critical retirement planning areas: income, expenses and insurance.”
First, determine your monthly income and spending needs in retirement.
“Be careful not to underestimate your discretionary budget for travel, shopping, eating out and spoiling the grandkids,” Adi says. “You will be surprised how quickly small purchases add up.”
Ask yourself this key question: Will there be areas you can cut back expenditures, say, by moving to a smaller home or town where the cost of living is cheaper?
Websites like Mint.com and YouNeedABudget.com offer free software to track spending and set up budgets.
If you’re offered an early retirement package, really scrutinize it. Buyouts are often complicated and not cookie-cutter. Most are negotiable to some extent, too.
You have to truly understand what the deal is that’s being offered, says Dennis Notchick, a Certified Financial Planner for Stratos Wealth Advisors in San Diego. That goes beyond how much money you’ll receive, which is often related to your tenure with your employer.
“Is it a lump sum? Is there an annuity option, lifetime income payments?” Notchick says. A lump-sum buyout can balloon your income for the year which can result in a significant tax bill. If you can take the payments in stages, that could lower your IRS bill.
If you are married, you’ll want to pay special attention to the payout rules.
“Sometimes a person will take a lifetime income payment, but if they die, their spouse gets nothing. Sometimes a survivorship benefit of fifty percent or two-thirds is an option,” says Notchick.
To immunize yourself against future tax rate hikes due to federal deficit spending, Notchick says, you may want to use some of your early retirement money to open a tax-sheltered Roth IRA.
“Evaluate your annual expenses and multiply this by 25.”
Be sure to review any medical coverage, too. A typical offer includes one year of health coverage.
Access to an employer health plan might be something you can negotiate for an extended period of coverage.
When job-based plan coverage ends (and you’re not yet eligible for Medicare), you can usually continue enrollment for up to 18 months — sometimes longer — under a federal law known as COBRA, which stands for the Consolidated Omnibus Budget Reconciliation Act. It requires firms with at least 20 employees to offer this option.
Normally, you have up to 60 days to elect COBRA and another 45 days to pay the first premium (covering the period dating back to your coverage loss). But if you’ve been laid off or furloughed due to the pandemic, a recent federal rule gives you more time to decide about COBRA.
The date to elect COBRA now begins March 1 (the end of the COVID-19 “outbreak period”) and will end 60 days after whenever the government ultimately declares the COVID-19 emergency over. So, according to NPR, if you were laid off in April and the COVID-19 emergency ends Aug. 31, you’d have 60 days beginning Aug. 31 — the end of October — and then the regular 60-day COBRA election period after that.
So, people laid off because of the coronavirus outbreak have at least four months, maybe more, to decide whether they want to elect COBRA.
The drawback: COBRA premiums are steep. Figure on something like $600 a month per person or more.
“Finally,” Notchick says, “is long term care of concern? Are you currently covered by a long-term care policy at work? If so, can you keep it when you retire? And is it worth keeping?”
Determine your retirement income sources. Carefully review your anticipated income (Social Security benefits, pensions, distributions from personal investments and savings) and expenses (weekly, monthly and yearly budgets).
Many major mutual fund companies have retirement calculators on their sites that can help you with this exercise.
“Focus first on guaranteed sources, such as Social Security and pensions. Then calculate your monthly cash needs from investments,” Adi says. “If you are fortunate to have a pension, evaluate your payout options and determine if your pension payment adjusts for inflation annually.”
The Social Security Administration website can let you get an estimate of your future Social Security benefits and a record of your lifetime earnings history.
If you’re married, you’ll need to determine when it’s best for each of you to start claiming Social Security. “Do you need to trigger both you and your spouse’s Social Security policies when you retire?” Notchick asks. “Can you take one or both later and let it increase?”
The AARP website has a useful Social Security benefits calculator.
Plan your withdrawals from savings and investments. A conservative annual drawdown of retirement savings may be to take 3% the first year, and to adjust for inflation after that.
If you’ve been fortunate enough to have saved $1 million, for example, plan to withdraw $30,000 in the first year and to increase that amount by the rate of inflation in the second year and beyond.
Some financial advisers stick with the 4% rule for retirement withdrawals.
“Evaluate your annual expenses and multiply this by 25,” Connell says. “This will give you the amount of money you must have order to qualify for standard 4% withdrawal rate and not run out of money.”
If you’re not taking an early retirement offer with health coverage and are thinking of retiring before 65, be sure to take health insurance into account. You won’t yet be eligible for Medicare, so health insurance will be a huge consideration.
If you have a spouse who is still working, you may be able to tap into health coverage via his or her employer. Otherwise, look into Affordable Care Act options through healthcare.gov or your state’s marketplace.
At 59, I currently shell out around $800 a month for a health insurance plan that has a high annual deductible: $7,500.
Talk to a financial adviser. An expert can help you work through your early retirement puzzle. I recommend working with a fee-only financial adviser, rather than one who charges commissions. And look for one who is a fiduciary — which means this pro puts your interests first.
Some databases to search for a certified financial planner: the nonprofit Certified Financial Planner Board of Standards, the National Association of Personal Financial Advisors, the Financial Planning Association and Wealthramp.com.
By Kerry Hannon
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