Five Important Considerations of Involuntary Retirement
It goes without saying how much of an impact COVID-19 has had across the country. The most recent reading of 2nd quarter year over year GDP growth was released last month and it showed the U.S. economic output contracted by almost 33%. While much of this had to do with widespread shutdowns across the country it was also felt in my local economy in Rockford, IL where unemployment reached 22% in April. For some context, the unemployment rate reached a high of 17 percent during the Great Financial Crisis (2007-2009). Unfortunately for those close to retirement, the global pandemic has brought about a combination of reduced working hours, furloughs, or even permanent job losses.
Many individuals are faced with the choice of returning to work or starting their “forced” retirement earlier than they expected. One benefit is that some employers are offering early retirement packages to help lessen the financial hardship caused by the pandemic. If you’re faced with a similar choice, you may have several options to choose from.
Is Your Employer Receiving Federal Aid?
Because they accepted $25 billion in federal aid back in April, U.S. based airlines are prohibited from laying off or cutting the pay rates of any workers through September 30. As a result, some of their employees have been offered early retirement packages because it does not violate the conditions of receiving federal aid. Many expect the federal aid to expire on September 30th and employees have accepted early retirement packages to avoid being laid off this fall. If your employer offers you an early retirement package, it is important that you to understand the details of the offer and how they impact your retirement plan.
Will You Remain on Your Employer’s Health Plan?
It is not uncommon for employers to offer continued health insurance for one to two years or until you reach age 65. If your employer offers to continue your health insurance, consider yourself very fortunate. This will help significantly reduce your healthcare costs prior to age 65 (Medicare eligibility). Another option may be to find a plan through the Health Insurance Marketplace on HealthCare.gov. Apply online to see if you qualify for a private plan. Depending on your income and household size you may be able to qualify for premium tax credits (PTC), which could significantly reduce your monthly insurance premiums.
If You Have a Pension
Pensions are not as common as they used to be, but that does not mean they are non-existent. You may find yourself in a situation where you have four or more pension options to choose from. The most common question I’m asked when it comes to making a decision about pensions is, “Should I take the lump-sum option or annuity payments?” My answer: It depends. For those who do not have a huge current income need, a lump sum may make sense because you can rollover the benefits into a retirement account and continue to defer the taxes. An individual who needs the income today may need to start annuity payments sooner. This important decision should take your current retirement savings and other income sources (rental income, Social Security, severance pay, etc.) into account.
Severance Pay or Accrued Vacation
Severance pay is typically offered as a lump sum and is taxable in the year it is paid. However, it could also be paid over a longer period of time. It’s weird to think that your employer is paying you to go away but there are tax considerations to think about before moving forward.
Asset Allocation (70/30, 60/40, or something else)
Because you are retiring earlier than expected, your retirement savings will likely need to last longer than you originally planned. I suggest reviewing your current asset allocation strategy (mixture of stocks/bonds) and whether it supports your short-term and long-term goals. The most common mistake I see from investors is that their portfolio is not constructed to meet both. Having too much of your portfolio in bonds early in retirement provides growth challenges because you need enough growth to sustain living expenses for 20-30 years. It’s helpful to keep in mind that too much stock exposure leaves you susceptible to unnecessary downside risk (what we saw in March).
What’s Next?
Even though receiving an offer for early retirement is often a stressful event, it opens a world of considerable opportunities for the next stage in your life. You’ll have the opportunity to dedicate more time to a local charity or spend more time with your grandchildren. You can also redesign your work and build in more discretionary time into your schedule. You may see this time as an opportunity to have your cake and eat it too.
Jeffrey R. Lewis
Financial Advisor