When recessions strike, companies try to cut costs, often via offering early-retirement packages to employees. The current COVID-driven recession has been particularly hard on the travel sector, so unfortunately it wasn’t a surprise when Delta rolled out their Enhanced Retirement Program earlier this year.
Employees who qualify for Delta’s program will receive a cash severance payment based on their years of service, up to 24 months of fully paid healthcare coverage and a Retiree Medical Account to help cover healthcare expenses. They will also receive enhanced travel privileges, including positive space passes. With the exception of the travel benefits, the structure of Delta’s package isn’t dissimilar to voluntary retirement packages we have seen other employers offer during economically challenging times.
Weighing the Decision
So, what should you do if you’re offered an early retirement package? Here are a few questions to consider as you weigh this critical decision.
1. What’s the value of the package? Start by taking an objective look at the value of the package you’re being offered. Then consider the likelihood of future layoffs with retirement packages of lower value, or perhaps no package at all.
For example, let’s say your annual salary is $200,000 and you’re offered an early retirement package that provides a severance payment of $100,000 and two years of fully paid healthcare coverage. Let’s also say there’s good chance you could be laid off sometime in the next year and offered no package. Six months of continuing employment is your breakeven with the severance pay, so your decision may come down to how likely you think it is that you’ll lose your job and receive nothing.
2. Do I want to find another job? If you’re relatively young and want to keep working, what do the job prospects in your industry look like? If your current employer is reducing headcount, there might not be many other good opportunities for you, at least not right now.
On the other hand, taking an early retirement package could give you the chance to try a new career or industry — or maybe even launch a new business. The severance pay and healthcare benefits could provide the financial cushion needed to get you and your family through the early months of your new business launch.
3. Am I financially ready to accept the retirement package? Regardless of whether you’re planning on retiring or finding another job, you should confirm you’re financially able to make the transition. Job change or starting a business will very likely bring with it decreased cash flow for a time, so you’ll want to make sure you have the resources to weather a period of lower income. Planning for retirement is also complex, and if that’s your intention, you’ll want to make sure immediate retirement is financially feasible. Don’t overlook health care either as you put together your retirement plan. Given current healthcare costs, being eligible for Medicare is often the difference between successfully retiring early and needing to continue working.
4. Am I emotionally ready to retire now? If you do believe you’re ready to retire, have you thought about the non-financial aspects of retirement? For example, how closely are you defined by your job? How important are your friendships and connections at work to your social life? And how will you avoid becoming socially isolated in retirement?
Give some serious thought to what the retirement lifestyle will look like for you and your spouse. Do you each have hobbies and interests that will keep you busy and intellectually stimulated? Do you want to travel extensively and spend time with your kids and grandkids? Or do you prefer staying close to home and maybe working on projects around the house?
Important Financial Factors
Let’s say that after weighing these factors you decide to take the early retirement package you’ve been offered. One of your first financial decisions will be what to do with your severance payment, assuming you receive it in a lump sum: Should you just park it in a low-risk, low-return money market account or invest it in the market?
The answer depends mainly on your time horizon for the funds. If you will need them to meet your everyday living expenses in the coming months, you should deposit the money in a savings or money market account. If you have other funds you can tap to meet your living expenses, you might choose to invest the money in search of higher returns.
What if you have pension benefits that offer either monthly pension payments over a period of time or a lump-sum payout — which option is best? According to one rule of thumb, if the monthly pension payment will be 6% or more of the total lump sum, taking the pension payment could be best. But if the monthly pension payment will be less than 6% of the total lump sum, you might be better off taking the lump sum and investing it. Here, you’d essentially be creating your own personal pension plan. Still, rules of thumb are just that, and you’ll need to analyze your specific situation to identify the best option for you.
Another financial decision will be what to do with the funds in your workplace retirement account, such as your 401(k)? Should you begin taking distributions as soon as you part with your employer or leave the account intact? Another option is to rollover your 401(k) funds into a traditional or Roth IRA. The answer will depend on your age, tax situation and other factors specific to your unique circumstances.
A Highly Personal Decision
Whether or not to take an early retirement package is a highly personal decision that everyone must make for themselves. Carefully consider the questions listed here and these financial factors to help you make the right decision for you and your family – and if you need help, consider working with a financial advisor.
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