As companies look for ways to reduce their workforce to trim costs during the pandemic, more are offering early retirement packages to their employees. And it’s not just affecting individuals in their late 50s or older. Younger workers who are in their 40s are getting offers too. The trend has become widespread in industries such as airlines, hospitality, restaurant and retail, but it’s gaining momentum across sectors. It is also an option being offered to teachers and government workers nationwide.
“Many of these individuals had no plans to immediately retire, but unfortunately Covid-19 has taken this choice away from them,” says Stacey Francis, a certified financial planner in New York and president and CEO of Francis Financial.
This comes at a time when the country is in a recession, traditional jobs are scarce, and health concerns are rampant. Fear among the rank and file over job security is growing, according to financial experts. And it is exacerbated by the fact that one in four baby boomers would rather delay retirement until the dust settles on the coronavirus economy, a new study conducted by The Harris Poll on behalf of the Nationwide Retirement Institute reveals.
That sentiment is due to the fact that additional years in the workforce allows you to delay filing for Social Security. Filing at the earliest age (62) gets you 75% of your annual full benefit; every 12 months of delay past your full retirement age (currently around 66, depending on your year of birth) gets you an additional 8% until you turn 70. Working longer also can mean saving more, living off those savings for fewer years and getting more years of employer-subsidized health insurance.
Do your homework
David Rae, a certified financial planner in West Hollywood, California, and president of DRM Wealth Management, is increasingly seeing early retirement packages being offered to his clients — especially in the entertainment field at such companies as Sony.
For many, an early retirement offer it is not a shock, but for others it is, financial advisors concur.
Rae said if this happens to you, the first thing to do is reevaluate your life and ask yourself these key questions.
“First, do you have enough savings in hand to comfortably retire? Are you a health risk during the pandemic? Are you at point in your career where you want to transition to gig work? Keep in mind this could be a segway to another career.”
The answers to all these questions will help you decide your next move, the CFP said.
“Above all, realize you don’t have to accept the first offer that comes in, there is room to negotiate better terms in many cases,” Rae noted. “In an era when so many people are afraid to go back to the workplace, dictate your choices, be sure to do smart financial planning.”
Typically, early retirement packages include one to two weeks of severance pay for every year you worked at the company, but some organizations are now capping it at up to six months because cash flow is tight, says Andrew Sherman, a labor attorney and partner of Seyfarth Shaw in Washington, D.C. They also may include accrued vacation and sick leave.
Incentive compensation such as restricted stock and stock options should be carefully reviewed as a component of the early retirement package to determine whether these rights have been vested, how long you have to exercise them, or whether they are forfeited upon your departure of the company. This is a common employee incentive offered by companies of all sizes for those in sales and managerial positions.
Depending on your spouse or life partner, continuation of health benefits is key, especially now during the Covid-19 crisis, Sherman said. You can get COBRA health coverage for up to 18 months, under federal statute, but there is a catch: It is expensive, and you may have to pay for it. The employer is under no obligation to foot the bill. That’s why it is important to negotiate terms to see how long the company can continue to fund or co-fund COBRA payments.
As Francis explains, 100% of a COBRA premium can easily be $1,000 a month, and it rises to $2,000 a month for a family plan. “Even if you saved enough for retirement, your expenses will skyrocket because of health insurance. And you need to consider the financial gap you have paying for health care until you are eligible to receive Medicare.”
“If your spouse has health coverage that he or she can have you join, you have a leveraging tool,” Sherman says.
There are other key insurance benefits to negotiate. “Try to see if you can get the company to give you a continuation of your life and disability insurance coverage,” Sherman said. “These are key benefits you want to hold on to if you can, often overlooked by employees when this happens.”
The new ‘gold watch’
Another area often overlooked is non-financial benefits, Sherman notes. This is a very hot area in early retirement right now and it includes keeping the company car; outplacement, coaching and mentoring services; career transition advice; financial planning services; education stipends for those who want to go back to school and get an executive MBA or an industrial certification.
“There are even companies that are considering offering seed funding to start an entrepreneurial venture to those who accept early retirement. Some of the tech companies are looking at doing this especially for women and minorities,” Sherman said. “Companies are offering innovative retirement benefits to boost the morale of their workforce and show that they care about people. It’s the new gold watch.”
In this age of social media, companies are under the microscope and they want to avoid any negative buzz tied to how they treat people when it comes to the end of their employment.
Be your own advocate
During the pandemic many people are seriously burned out and such an offer seems attractive, says Chip Munn, senior financial advisor and CEO of Signature Wealth Strategies. “Our work from home experiment has altered people’s expectations,” he said. “They like the lifestyle flexibility working from home provides, and they are glad they don’t have to commute during the pandemic.”
But he cautions anyone considering early retirement to do their homework and make sure the numbers work. “The biggest mistake people make is taking the first offer on the table thinking it is an open and shut case,” Munn said. “I encourage people to develop their own package and take it to their manager or HR department. “Design your ideal job and take it to them. They are just trying to solve their own problems, so be creative and propose it to them. It may solve a problem they are trying to figure out.”
That could mean proposing you work as a consultant, mentoring younger employees, or working from home part-time, Munn and other experts point out. This could be a career transition that allows the company to keep your honed skills, creativity and experience.
In today’s workplace environment, being prepared in advance for an early retirement call is key. “Don’t work behind the eight ball,” Munn said. “Meet with your financial advisor and develop a long-term strategy to secure your future.”
“After all, you don’t want this decision to turn your retirement nest egg into a goose egg,” Francis added.
