Wondering if an early retirement package offer from your employer is the best option for you? Should you accept the deal? Let’s take a deep dive — we’ll even look at sample early retirement packages.
In your 50s or 60s, you may face an impromptu decision about your retirement age if your employer implements an Early Retirement Incentive Program (ERIP).
Why Do Companies Offer in Early Retirement Packages?
Creating an ERIP can save your employer a lot of money in the long term.
Early retirement packages are designed to incentivize employees to retire earlier than they would otherwise. An ERIP reduces the workforce and targets more experienced (typically higher-earning) employees.
These early retirement packages also reduce the employer’s risk of being sued of wrongful termination, and they avoid the negative effect on morale that layoffs could cause.
Even though your employer may offer you financial incentives and benefits, it will likely cost them less than your normal full compensation would.
But just because the typical early retirement packages benefit your employer doesn’t mean that they can’t be a good opportunity.
Related: The Essentials of Fire: Financial Independence Retire Early
How Does an Early Retirement Buyout Work?
Your employer will have to determine the details of the early retirement packages, which employees are eligible for, and the timing.
Eligibility
Typically, insurance considerations (coverage amount and costs), pension vesting, and age/years of service will be the main criteria. Your employer may also choose to only offer early retirement packages to employees of certain seniority levels.
Timing
The typical early retirement packages will have two key dates to consider.
The first date is the retirement incentive window. This is when the employee gets to consider the package and decides to accept (or not).
Then, the retirement effective date is when the package is implemented. This is also typically the employee’s last day of work.
How Much Pension Do You Lose if You Retire Early?
The short answer: it depends. But you can ask this question directly when talking with your human resources department.
This question assumes, of course, that your company still offers a traditional pension. If it does, there’s usually a standard retirement age when you would receive full benefits — often at 65.
Understandably, you may have concerns that the early retirement package would prevent you from reaching this age of qualification.
However, remember that your employer is trying to incentivize you to accept the package. Often, an ERIP will include pension exceptions so that you can still access the pension plan despite retiring early.
Review the details of your plan and check to see if an age credit or compensation adjustment is included. We’ll talk more about these concepts in the next section.
And again, don’t be afraid to ask about the pension details directly after you’ve received the early retirement package offer.
What Is Included in an Early Retirement Package?
We’ll review some specific, sample early retirement packages later in this post. But, in general, the benefits of early retirement packages may include any combination of severance, continued health insurance coverage, pension upgrades, and other services and benefits.
Severance
One component of the early retirement package may be a severance cash payment. Severance payments are usually based on your years of tenure — one week of pay for each year of your employment with the company, for example.
In the US, no law requires employers to offer severance pay, though it is customary for ERIPs to include it.
Health Insurance
Since Medicare eligibility begins at age 65 for most people, early retirement packages tend to include a subsidized health insurance coverage continuation.
If not, you may need to coordinate with COBRA for access to continued coverage, but this may be more expensive. Using COBRA, you may have to pay up to 102% of the cost of the insurance plan instead of your previous employer-subsidized cost.
If your early retirement package includes COBRA access to health care, you may want to explore other options (such as HealthCare.gov or a sharing plan) to ensure you’re getting cost-effective coverage.
Pension
If you’re eligible for a pension through your employer, the early retirement package may include enhancements as part of the incentive program.
An age credit is one option that your employer can use. In this scenario, your employer will consider you to be older for the purpose. This can help you qualify for the pension earlier than you normally would or qualify for a larger benefit.
Your early retirement package may also include a compensation adjustment. You can be credited with extra years of service, and the company may agree to use a hypothetical annual salary increase in determining your pension benefit.
Both age credits and compensation adjustments “sweeten the deal” to make the early retirement package more appealing.
The details of your pension offer may be tied to Social Security, too. For example, your employer may boost your pension benefit temporarily until you can qualify for Social Security benefits at age 62.
Other Services
Some ERPs may also include outplacement services to assist if the employee wishes to continue working elsewhere.
Additionally, early retirement packages may include covering the cost of estate planning legal services or meeting with a financial planner.
What Is a Typical Early Retirement Package?
There’s no such thing as a truly “typical” early retirement package since it will depend on the employer’s specific financial standing, but let’s break down one example here.
Let’s assume you’ve been working for your employer for 15 years, you’re 55 years old, and your current salary is $75,000.
- Severance: 1 week of pay for each year of tenure
- Pension: Age credit to increase you to 65 years of age to qualify for the pension’s maximum benefits
- Health insurance coverage: Continued employer-subsidized health care access
- Outplacement services: not included
In this scenario, your severance equates to $21,634 before taxes (15 weeks of pay), health care coverage, and early pension access.
You’ll also need to consider any other assets and liabilities in the context of your full financial situation to decide if you should accept this offer.
We’ll take a look at a few more sample early retirement packages below.
A Real-life Early Retirement Package Example
I had the opportunity to talk with my friend Sebastian who worked for a local government in Oregon and was offered an early retirement package. We can keep his real-life example in mind when we review the sample early retirement packages below.
Here’s what I learned about Sebastian’s experience.
What Was Included in the Package?
Sebastian’s original offer included severance equal to 3 months’ pay and a pension equivalent to 75% of his salary at the time.
Negotiations
Sebastian negotiated the early retirement package offer. He asked for a full year of pay for severance, and they settled on 6 months of pay plus 6 months of health insurance coverage.
In the end, Sebastian accepted the offer.
Pros and Cons of Accepting the Early Retirement Package
Sebastian outlined many positives from his experience, and he’s been happy with his decision overall.
These are some of the challenges he shared:
- He had to adjust to the loss of the feeling of prestige from his job title. There was a period where he felt like he had lost part of his identity.
- His pension payments are lower than his full-time salary was, so that’s been a bit of an adjustment for budgeting.
- He realized that if he had stayed at work longer, his pension could have been even higher.
And here are some of the highlights:
- Even though they’re not eligible for Medicare yet, they’re able to get health coverage from his wife’s employer. Sebastian mentioned that healthcare coverage was one of the biggest factors in their decision.
- Sebastian was feeling burned out from his 30 years of full-time work and wanted a change of pace. Now, he does low-stress part-time work and spends time volunteering and doing financial coaching.
- He’s been able to spend more time exercising (playing handball is his favorite), learning a third language, and doing projects around the house.
Overall, he says life has gotten busy again — but this time, in a good way.
Sebastian says, “I have no regrets. At different times, I have experienced my life with no money, lots of money, and just enough money. We need the money to live, but I feel that it’s a mistake if we live just for money. Money is only a tool. Peace and happiness are my top priorities.”
Sebastian is enjoying life and living his own variation on the Semi-Retire Plan!
Sample Early Retirement Packages
Here are a few additional sample offers. Let’s look at the pros and cons of each.
For any package, you should consider your full financial picture while evaluating if you want to accept. We’ll talk more about this later in the post.
Sample Early Retirement Package #1 — No Severance
- Severance: Not included
- Pension: Age credit to increase you to 65 years of age to qualify for the pension’s maximum benefits
- Health insurance coverage: Continued employer-subsidized health care access
- Outplacement services: Not included
This sample package includes the early pension access and health care, which would be helpful for recurring expenses.
If you don’t want to continue working and you have significant personal savings, this package could be a good fit.
Sample Early Retirement Package #2 — Low Pension
- Severance: 1 week of pay for each year of tenure
- Pension: Age credit to qualify for the pension — receive half benefits until you qualify for Social Security
- Health insurance coverage: Continued employer-subsidized health care access
- Outplacement services: Not included
In sample package #2, you do receive the severance pay and also the health care coverage.
The major concern here is the pension plan. You’ll qualify early, but only receive half benefits. Plus, you’ll stop receiving the pension payments once you qualify for Social Security.
This plan is more of a “bridge” until you receive your federal benefits. You won’t be receiving a lot of long-term financial support from this package.
Sample Early Retirement #3 — No Health Insurance Coverage
- Severance: 1 week of pay for each year of tenure
- Pension: Age credit to increase you to 65 years of age to qualify for the pension’s maximum benefits
- Health insurance coverage: Not included
- Outplacement services: Included
This package does include severance and pension but no subsidized health care.
Sample package #3 does include outplacement services, though.
Paying for your own health care could be preventatively expensive. You would need to evaluate the cost of COBRA vs a HealthCare.gov plan vs other coverage options.
Would you be interested in continuing to work elsewhere until later retirement age? If so, you could leverage the outplacement services and receive health insurance coverage from your next employer.
Should I Take the Early Retirement Package at 55?
55 is a frequently-discussed early retirement age, and for a good reason. Starting at 55, you can avoid the 10% early withdrawal penalty more easily.
Let’s talk about the special age 55 rule and how you should evaluate if you want to accept an early retirement package.
What Is the Age 55 Rule?
Typically, if you access your retirement funds before the age of 59½, you are subject to taxes plus an additional 10% penalty. Starting at age 55, though, the IRS explains, you can avoid the 10% penalty under certain criteria:
- If you become separated from your employer in or after the year that you turn 55
- And, if you’re accessing funds from the retirement plan sponsored by that employer
So, IRA accounts do not qualify. Employer-sponsored accounts from previous employers also do not qualify, but in some cases, you could roll that previous account into your current employer-sponsored account.
This rule actually kicks in at age 50 for certain groups of public safety workers.
People like to discuss the “age 55 rule,” but I’ve written before about how there are actually additional exceptions to the early withdrawal penalty.
In any case, you should meet with a tax professional before making any of these account conversions or distributions.
Consider Your Entire Financial Situation
Don’t evaluate the early retirement package in isolation. Instead, consider how the package could fit into your full financial picture.
Were you already planning to retire early?
What will your retirement expenses be? Would the early retirement package enable you to cover those expenses?
If you accept the retirement package, will you need to find a new job to cover your current expenses?
You can use this free retirement-planning workbook to get a general idea of your situation.
You should also meet with a fiduciary, financial planning professional to get a personalized evaluation of your situation.
Consider Negotiating
If you don’t think the early retirement package would meet your financial needs in its initial format, you should consider negotiating the package with your employer.
In Sebastian’s experience above, he got 3 additional months of severance pay plus 6 months of healthcare coverage by negotiating. That’s an incredible ROI on one conversation, so don’t be afraid to negotiate.
Your employer may decline to negotiate, but remember, they want you to retire early so they can save money, so you do have some leverage.
Consider if You’ll Need To Find Another Job
Finally, if you need a new job to cover your existing expenses, consider what that could look like.
How much income will you need to generate in combination with the early retirement package? What type of new work would you like to do? How likely are you to be able to find that work?
If working is part of your early retirement plan, you may want to consider a semi-retirement strategy.
Related: What Is the Retirement Age in the USA
Summary: Review These Sample Early Retirement Packages, Then Carefully Consider Your Own Financial Position
I hope these sample early retirement packages have been helpful reference points.
Ultimately, make sure to consider how your specific package would fit into both your personal current financial position and your long-term plans.
Don’t be afraid to ask questions, negotiate, and consult with a professional as you make your final decision.
