Should You Take an Early Retirement Offer? Here Are the Pros and Cons

By John Csiszar

The days when employees would work for a company for the bulk of their life and then receive a nice pension at retirement are, for the most part, long gone. Not only are employees much more nimble these days in terms of changing jobs, companies themselves are constantly reshuffling their personnel to maximize their cost/productivity balance.

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Oftentimes, companies will offer certain employees early retirement packages, essentially buying out their remaining work years in an effort to trim their payrolls. If you receive an early retirement offer, it may seem quite generous upfront, but it’s important to analyze its pros and cons and how they may or may not fit in with your personal financial situation.

Here are some of the most important considerations to review before you accept such a life-changing deal.

Pros

Early retirement amounts to a major life change for most Americans, and that alone can be a stress-inducing prospect. But early retirement also carries some clear benefits.

You Get To Stop Working

Just the words “early retirement” are enough to get many workers excited about a buyout offer. If you’re burned out at your job, feel like you’re no longer fulfilled or simply want to move on to the next phase of your life, the most obvious pro of an early retirement offer is that you get to stop working.

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However, if this is the primary benefit you see in your early retirement offer, be sure to take a moment and evaluate the financial aspect of the transaction. Although freedom from work is a benefit that most Americans would enjoy, it’s certainly a negative if it means that you’ll be financially struggling in your golden years. Once the euphoria of dreaming of a life after work subsides a bit, get to work calculating the real-world math of the situation to ensure that it’s financially feasible for you.

You May Avoid the Next Recession

When economic times are good, companies tend to be more generous with their early retirement offers. But in the midst of recessions, many “early buyout offers” turn into layoffs, often with less-attractive terms.

If your company is currently offering a generous early retirement package, it may be a good time to grab it, as many economists are predicting a recession in the U.S. in 2023 or 2024. Since you’ll usually have greater negotiating power when a company is making you offer rather than issuing you a demand — i.e., forcing you into unemployment — it may be the time to take a close look at any early retirement offers you receive.

You May Snag Extended Benefits

Many early retirees think that their buyout package will only be a lump sum of cash. However, if you have a people-forward company — or are skilled at negotiating — you may find that your early retirement offer includes generous extra benefits.

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In addition to severance payments that may last for years, some companies also offer health insurance or disability coverage over an extended period of time. If you can grab a package that includes financial and insurance coverage until you either find another job or reach the age at which you can draw Social Security, you might be able to cover all of your financial bases.

Cons

Every financial decision you make in life carries both pros and cons. While the pros of early retirement can be very attractive, you’ll have to counter them with the potential negatives you may encounter.

You May Lower Your Other Retirement Benefits

The longer you work, the more credit you earn towards retirement benefits like Social Security and your pension (if your company offers one).

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Social Security retirement benefits, for example, are based in part on your highest 35 years of earnings — most of which come in your 50s. Your pension, if applicable, is also likely based on the number of years you work for your company. Thus, if you shorten your work career, both of those benefits will no longer increase.

Payments Will Expire

Even the most generous early retirement offers typically run out after a period of months or years. While you’ll still be entitled to whatever pension, 401(k) plan or other retirement payments you’ve earned, your actual early retirement benefits will eventually cease.

If you retire too early, you may run out of financial support before you reach the age at which your other retirement payments, including Social Security, may begin.

You May Have To Surrender Insurance and Other Protections/Benefits

If you work for a major company, you likely have a host of ancillary benefits in addition to your paycheck that you may not even value — until you need them.

Large employers typically provide some type of life insurance, health insurance and disability coverage plans, and those will all likely disappear if you accept an early retirement package. Or, perhaps they will only be extended for a relatively short time. You may also lose other perks your company provided, such as club memberships or a company car.

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