Incentivized to Retire Early? Read This First

| ARIE J. KORVING, CFP®

You have come to a time in your life when you are debating an early retirement because your company has offered you an early retirement incentive. You may have saved and invested money along the way to where you have created a substantial retirement fund. Yet you are not sure whether the money you saved and the early retirement incentive is enough to handle the current economic times and financial uncertainties. You may wonder whether any type of emergency or the rising costs of living could force you to return to work. 

Seeking early retirement is a big, life-changing decision. Here at Korving & Company, we help people make sound financial decisions regarding their retirement plans. Our firm provides consultations and recommendations regarding your options for building up a retirement fund, pursuing wealth via investments, and developing an income plan for your retirement. Learn more about the advantages and disadvantages of early retirement benefits.

Should I Accept My Employer’s Offer to Retire Early?

Companies may offer their employees early retirement incentive programs (ERI) that encourage them to leave their job before their expected retirement date. The employer may offer these incentive programs for various reasons, such as trimming payroll due to corporate restructuring, having too many full-time employees, or creating short-term employee rollover to bring in new staff. Early retirement incentives may also be offered to a group of eligible employees in a department that the company plans to dissolve or release during layoffs, or they may offer you a personalized retirement package because you are an older worker nearing the customary retirement age range in a few years.

Know that an early retirement incentive is a completely voluntary option. You have the choice of whether to accept the offer or reject it. Acceptance of the offer means you will accept the retirement incentive plan as-is and that you will file your retirement notice by a specified effective date. Some companies may allow you to negotiate the details of your retirement package to tailor it to your present and future financial circumstances. The incentives for early retirement may involve severance pay covering weeks or years of wages. They may also offer other additional benefits, such as help finding another job.

You may also decide to reject the offer. Keep in mind that by making the offer, the company is giving you an indication that they are looking to pare back in some way. ven though you provided years of service, they may eventually decide to let you go at a later date anyway. Try to understand why the company is making the offer so that you can make an informed decision of whether to accept it or not.

What Steps Do I Need to Take to Prepare for Retirement?

You will want to engage in some financial planning before officially reaching retirement. Think about and define how you want to live during retirement. Do you plan to move to a retirement community, travel the world, or downsize to a smaller place closer to family? Think about how much money you will need to pursue your retirement dreams and then take stock of your current assets. Also, evaluate your physical health and mental well-being. You may need continuous medical care that will no longer be covered by your employer’s health insurance. Does your career define you, and will you be comfortable finding new outlets in retirement?

A good financial plan will help you create a retirement budget that covers your living expenses, addresses your other needs and wishes (such as vehicles and travel), and also looks into the potential impact of any emergencies that may appear. Your financial planning professional will also want to know how much income you will collect from Social Security, pensions, settlements, rental properties, and other sources. You should map out how much money flows into your bank account and the payment schedules for your expenses.

How Do I Know If I’m Financially Prepared to Retire?

Once you understand the details of your early retirement incentive package (ERIP) and have created an inventory of your existing assets, you want to create a list of the possible expenses you will have during retirement. These expenses may include housing, transportation, food, clothing, utilities, insurance, taxes, outstanding debts, health care,  and other mandatory expenses you may incur during a fiscal year.

Then, consider how much you typically spend pursuing hobbies, travel, and entertainment. Compare your income versus mandatory expenses to see how much discretionary income is left. This helps determine if you will have enough funds to live comfortably during retirement or if you have to find additional income sources that may be available.

Retirement also involves being mentally prepared. Will you be happy retiring early or does working at a job make you happy or give you a sense of structure and purpose? Job satisfaction or dissatisfaction becomes a major factor in deciding the right time to seek retirement.

Another factor to consider is whether you are physically or mentally able to continue working. For some people with healthcare problems, it becomes too difficult to continue working.

What Are the Advantages of Early Retirement?

Early retirement may provide you with peace of mind. You do not have to worry about deadlines, busy work schedules, getting permission for travel or sick leave, and always trying to please clients or customers. Instead, you now can focus on your personal needs, leading to an increase in mental and physical well-being. You’ll have time to pursue all that you want to do in your life, such as travel, hobbies, or spending more time with family.

You could also have the opportunity to start a new career if you pursue voluntary early retirement. With a lump-sum payment, you may have the working capital to start a business and be your own boss. You could also pursue educational goals or lifelong hobbies during this period of time. Studies have shown that seeking activities that make you happy has beneficial impacts on your mental and physical health, leading to greater levels of happiness.

What Are the Disadvantages of Early Retirement?

Agreeing to take an early retirement incentive may create disadvantages if you are not financially prepared. Loss of employer-sponsored health insurance is one potential disadvantage unless you are eligible for Medicare or you have a working spouse. No insurance means that you may have to pay for medical expenses out of pocket. Even if you purchase individual health insurance, it can be very expensive and may offer fewer benefits than what you had previously with your employer.

You may find yourself in a financially unstable position if you don’t closely watch your spending habits. If you spend too much of your pension plan, monthly Social Security, and/or retirement savings on items that are discretionary and unnecessary, you could find yourself without a financial safety net and unable to handle emergency expenses. You don’t want to end up in a situation in retirement where an emergency could put a financial strain on your retirement savings. Things that many people look at to help them determine whether to retire early are how much they may gain from retirement system benefits such as Social Security and employer-sponsored retirement plans, as well as the cost and benefits of Medicare. You will not qualify for Medicare until reaching the age of 65. While you may be eligible to opt-in to COBRA to stay on employer-based health insurance, this is a short-term option as COBRA benefits don’t last very long until they expire.

Employer-sponsored retirement plans, such as 401(k) plans, typically require you to be age  59 1/2 to be allowed to take a distribution without an early withdrawal penalty. If you start withdrawing funds from the plan before that age, you are typically subject to a 10% penalty. You also have to pay income taxes on the money you take out, regardless of your age.

When it comes to Social Security, you receive a smaller benefit amount at your earliest retirement age. You become eligible for Social Security at the age of 62, yet if you were born after 1960 you will not get your full benefit amount until you are 67 years of age. Instead, if you take Social Security at age 62, you’ll only get 75% of your expected benefit.  If you delay taking Social Security until age 70, you will get your largest possible benefit amount.

Lastly, think about whether you would really be happy retiring early.  Some retirees find themselves bored and wishing for things to do. Consider whether you’ll miss the friendships and camaraderie created at work or socializing with customers, or if instead, you look forward to keeping and strengthening old friendships or creating new ones and looking forward to new adventures.

How Can Korving & Company Help Me Decide?

Korving & Company offers financial planning, retirement planning, wealth management, income planning, and general financial investment advice for our clients. Located in Suffolk, Virginia, we help people decide whether they can retire early. We strive to provide financial planning services that allow clients to make the appropriate retirement decisions that suit their lifestyles. Call today (757) 638-5490 or complete the online contact form to speak with an experienced financial planner at Korving & Company.

Arie J. Korving, CFP Co-founder, Korving & Company 3

Written By ARIE J. KORVING, CFP®

Arie J. Korving, a CERTIFIED FINANCIAL PLANNER™ professional, has been delivering customized wealth management solutions to his clients for more than three decades. Prior to co-founding Korving & Company, he was First Vice President with UBS Wealth Management and held management positions with General Electric.

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