Should You Take the Offer? 9 Things to Consider About a Voluntary Retirement Package

Voluntary retirement packages, also known as early retirement incentives or voluntary separation packages, can present a valuable opportunity for employees who are approaching retirement. Evaluating and choosing to accept or decline such an offer is a significant financial decision that deserves careful analysis. At CWM, we encourage clients to evaluate these packages not only based on the immediate payout but also on how the decision will affect their long-term financial security, healthcare coverage, tax situation, and personal readiness.

1) Understand What the Package Includes

Typically, these packages include a combination of severance pay, pension enhancements or enhanced 401(k) matching, continued healthcare benefits, and unused vacation/sick leave payouts. It’s important to evaluate the package as part of your overall financial plan, not just for the immediate payout. Doing this will help determine how long any lump-sum payment will realistically support your needs/goals before looking elsewhere to fund these, such as your savings or investment and retirement accounts.

2) Evaluate Income Replacement

Depending on your age, it is important to consider whether the package will help bridge gaps before being eligible for Social Security or a pension income. Do you have other sources of income from areas such as rental properties or consulting/freelancing work? You’ll want to assess whether these incomes sources will cover expected expenses or if you will need to withdraw funds from your investment accounts.

3) Analyze Healthcare Benefits

A main component that can be easily overlooked is estimating healthcare costs before Medicare eligibility. Before taking a voluntary retirement package, it is critical to determine whether the package includes continued employer-sponsored insurance or any healthcare subsidies. If it is offered, it’s a good idea to compare employer-provided coverage to purchasing insurance independently. In our experience, we often find that healthcare benefits may be more valuable than cash incentives because of the cost of private healthcare and coverage levels.

4) Review Pension Enhancements

It is not uncommon for companies who provide pensions to offer pension enhancements at the time of introducing voluntary retirement packages. These can come in the way of increasing years of service credits, or even more favorable benefit calculations overall. A sound practice is to request several pension estimates surrounding different scenarios and start dates. As advisors at CWM, we use these estimates to stress test our client's financial plans, and ultimately determine which scenario compliments their financial goals.

5) Understand the Tax Implications

Severance payments, lump-sum distributions, and vacation/sick leave payouts can increase your income and push you into a higher tax bracket. Where possible, it’s a good idea to explore opportunities to defer or rollover eligible funds to minimize the tax burden. Work with your financial advisor and tax professional to maximize after tax income and avoid costly surprises come tax time. Remember, early retirement often involves decisions around retirement account distribution planning, Roth IRA conversion strategies, capital gains planning, healthcare subsidies, and social security timing strategies; these all have a significant impact on your long-term tax bill and should be carefully considered prior to making your decision

6) Determine What to Do with Employer Retirement Accounts

Upon separation from your employer, take the opportunity to review the distribution choices available through the employer-sponsored plans, such as a 401(k), and whether it makes sense for your situation to roll those assets into an IRA. Often, IRA investments can offer a wider variety of investment options, with additional flexibility around withdrawal options, and tax treatment. Please review the advantages, disadvantages, considerations, and disclosures.

7) Review of Legal Agreements

Your separation package paperwork is a legal document and should be carefully reviewed for things such as waiver of rights, confidentiality clauses or NDAs, and restrictions on future employment or con-compete agreements. We encourage you to seek legal advice when agreements are complex or involve significant benefits or restrictions. While CWM cannot provide legal advice regarding these documents, we can provide tips for language to be aware of and introduce you to our network of legal professionals for additional review and assistance.

8) Assess Personal Readiness for Retirement

Retirement is a major life decision. While financial readiness is important, it’s equally valuable to consider how retirement supports your personal goals, sense of purpose, and vision of the lifestyle you want to lead. Would part-time work make the transition to full-time leisure easier? Would you like to volunteer for a cause that is important to you? Is there a hobby you’ve been meaning to pursue? Research has shown that mental stimulation, particularly ongoing learning and problem solving, is one of the best ways to keep the brain youthful. We encourage our clients to develop a plan for staying engaged with their mind and with a community.

9) Plan for Inflation and Longevity

Retirement may last 20-30 years (or longer) and a continually, well-tested financial plan is an important tool in helping to make sure your assets and goals remain in alignment. We update our clients’ financial plans at least annually to ensure their strategies remain sustainable under various conditions. At CWM, we pressure test our clients’ retirement plans against higher inflation, market downturns, unexpected healthcare expenses, as well as other, more individualized, scenarios. As the old saying goes, “you don’t plan to fail, you fail to plan”.

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Ultimately, the decision to accept a voluntary retirement package should be based on a comprehensive financial analysis to determine if it is right for you. Identical voluntary retirement packages offered to two co-workers of the same age, doing the same job, in the same company, can yield vastly different results when simulating retirement.

A voluntary retirement package can be the start to a successful and fulfilling retirement. However, that can only be true when its long-term implications are carefully understood and incorporated into a comprehensive financial strategy.

At Comprehensive Wealth Management, we evaluate the package within the framework of a complete retirement plan; taking a thoughtful and disciplined approach, so we may help our clients make informed decisions that support both their financial well-being and their vision for living richly.

If you or someone you know is considering retirement, whether due to a voluntary retirement package offer or because you’re ready for the next chapter, give us a call at (425) 778-6160 to schedule a complimentary 30-minute call with a CWM advisor.