Things to Consider if You Were Offered an Early Retirement Incentive Package

September 02, 2011

Over the last month, most of my working hours have been spent talking to people about the reality of deciding, in a short time window, if they are going to retire in the next several months.  Why?  These people have all been offered an early retirement incentive package with a deadline for accepting or rejecting the offer.  This meant that, for them, retirement was no longer something that was “out there in the future.”  It became a “right here, right now” opportunity.  There were things I learned during that process, and over the next 2 weeks I’ll talk about the “universal” factors.  Each person had their own story, their own situation, and their own set of circumstances that was remarkably different than anyone else’s.  But, there were some factors that were important to every single person I met.  They all asked about several factors that would impact the rest of their lives.  Here are the first few factors (more to come next week):

Health Insurance:

What will I do about health insurance until I qualify for Medicare?  The single biggest concern of this group of potential retirees was health care.  COBRA can last 18 months, but that wouldn’t be long enough to bridge most people in the group until age 65.  They were faced with a very difficult decision.  Health care costs are rising every year.  There is uncertainty about the future of health care legislation in this country.  For budgeting purposes, a 10% – 20% annual increase in costs seemed to be what this group settled on (as an average observation), and that seems like a reasonable expectation about the cost increases until Medicare kicks in.  The most common theme was “building the bridge to 65.”

My take:  This was by far the most important factor that made people hesitate from accepting the offer immediately.  The closer to 65, the easier it was to build the bridge.  I can’t think of a single person who didn’t have the cost of insurance as their primary obstacle to saying yes to the offer.  It was an eye opener.  What can you do now to build your bridge?  Fund your HSA if you have one.  If you don’t, set aside a “health insurance” fund, perhaps in a bank that isn’t very convenient and doesn’t have an ATM card linked to the account.  You can save money into that and use it to fund your health insurance costs between retirement and Medicare.

Social Security:

At what age should I take Social Security benefits?  After the health care question, this was the next most important concern of the potential retirees.  Is age 62 right for me?  Should I use my investments and 401(k) to live on until I get to full retirement age (66-67 years old)?  Should I try to hold off until age 70 to maximize my benefits?  Wow, that IS a tough question to answer in broad terms.  Some of the things that factor into the answer are not surprising, but when faced with an immediate decision they may not be exactly top of mind.  What is your family health history?  Longevity history?  What other assets do you have that can provide an income?  Is there a spouse in the house (I was always a Dr. Seuss fan!) who has an income?  Do you plan to work at another job and therefore have to be concerned about the Social Security earnings “penalty?”  (For those who have not reached full SS retirement age [66-67] every $2 earned above $14,160 will cause your Social Security benefits to be reduced by $1, which essentially penalizes you for earning an income while collecting Social Security.)

My take and what you can do about this decision:  From a purely numerical perspective (I’m a  financial geek, so the numerical answer makes sense to me!), delaying the receipt of Social Security income as long as possible maximizes your monthly income, and should be what you strive for.  But, do you NEED the money sooner?  Don’t let the perfect solution get in the way of a very good, workable solution for you.  Do you expect to live until age 70 (which would argue for taking the benefits at age 62 or ASAP) or do you plan to live to age 100 (which would argue for age 70 as the start age)?

There are facts (other sources of income, size of investment portfolio, etc.) and there are assumptions (life expectancy, cost of living projections, etc.) that factor into your decision on Social Security.  There is no “1 size fits all” solution to this one.  If you know your precise date of death and the precise rate of return on your investment portfolio between now and that date of death, you could make a perfect decision.  Absent those 2 “minor” facts, you have to make an educated choice based on your individual circumstances.  Since I expect to live a long life, I plan to wait as long as possible.  One of the people I talked to recently (and my newest friend) expects to live only until her late 60’s or early 70’s at the longest.  She is taking Social Security at the earliest possible time, in fact she has the application filled out and is ready to take it to the Social Security office on the day she turns 61 and 9 months!  (The earliest date you can apply.)  I suspect that the right answer for most people is somewhere between the 2 extremes of me and my new friend.  What’s right for you is going to be taking a look at your budget, your sources of income, and determining based on your circumstances, what age is right for you.

These were, by far, the two most important questions that these potential retirees had on their minds.  There were a lot of others, and we’ll talk about those next week.