Early Retirement Buyouts: A Good Idea for Who?

March 08, 2011

A school district in Minnesota recently announced an early retirement incentive program to entice their most senior (and highly paid) teachers to retire in order to replace them with less experienced teachers with lower salaries. The program has an interesting twist – if at least 10 teachers take the buyout, each will receive $15,000 but if at least 15 accept, then they will each receive $20,000. I can imagine a bit of peer pressure will be felt by those teachers who are on the fence about taking the bait.

How do I know these details? One of the teachers eligible for this early retirement incentive attended a workshop I was facilitating at her husband’s place of employment, where I happened to be discussing details on Retiree Medical and Medicare coverage (which happens to be next week’s subject I’ll cover).

The teacher I met has 30 years with the school district, and will be turning 62 this year. If she took the $20,000 buyout, she would be quite comfortable drawing both her pension and Social Security, and she may even be able to find a part-time job in the neighboring school district to keep her busy. Her biggest fear was that by retiring at 62, she would lose her employer-provided health insurance. She was grateful to find out that she could be covered under her husband’s plan, even after he retired.

So what was she waiting for? She still loved going to work everyday, and she was emotionally attached to the kids in her classroom. She worried that if she and many of her peers left, it could hurt the quality of the education due to a loss of the most experienced teachers. What she should have also been considering is the long-term impact on her finances. So here are a few things that every employee should consider when faced with an early retirement incentive:

Can I afford to live comfortably on my current retirement income? Many early retirees take a buyout, assuming they can easily go find another job, but with today’s high unemployment rates that may not be a reality.
What will the impact be on my retirement account balance? Once you stop working, you can no longer make additional contributions to your retirement accounts and it may even be necessary to start drawing down your balance earlier than planned if you need the income.
Will I have access to health insurance coverage? This may be the most overlooked item, so it is important to research if you will be offered retiree medical from your employer or perhaps you can be covered under your spouse’s plan.
How will early retirement impact my Social Security benefit? Even if you wait to draw your Social Security benefit, you could receive less if you don’t have 35 years of work history when you take the early retirement buyout.

So in the case above, what was good for the school district’s budget may not be a good deal for the teachers, and the kids that will miss them in the classroom.