Questions to Ask When a Client Receives an Early Retirement Offer

Aug 18, 2020 Share This 

Early_RetirementAs a result of the global pandemic and its economic fallout, many companies are looking for ways to remain financially solvent by reducing their workforce. On top of millions of employees across the U.S. filing for unemployment, some are weighing decisions over whether to accept a voluntary buyout or early retirement package.

In addition to talking with clients about the market impact of the Coronavirus, they may come to you for advice on whether to take their employer up on such an offer. Getting answers to some of the following questions may help them determine next steps.

Do you have a plan to generate enough long-term income?

If the thought is to find other employment, that possibility may not be as likely as it was a few months ago before millions of other Americans found themselves hoping to do the same.

On the other hand, if the idea is to enter retirement early, a client’s age is a major factor when determining whether they should take a buyout from an employer. For clients in their early to mid-60s, an attractive severance pay as a part of an early retirement offer may be enough to bridge the gap before Social Security kicks in. Collecting before full retirement age, however, could result in as much as a 30% reduction in lifetime benefits.1

No matter the age, it’s critical to weigh the costs based on their investment horizon. A retirement package may seem generous at the time, but could result in giving up a sizable amount of income when calculated over the long term.

How will you pay for health insurance?

Despite many legislative efforts to reduce the costs of health insurance premiums, they can be expensive and may account for a significant portion of someone’s budget if required to pay the full amount out-of-pocket. Before making a decision to take a company buyout, your client should research available plan options to see how much they’ll need to pay for adequate coverage. They may be shocked at the figure.

A company may offer health care coverage for a set duration, such as 18 months, which might be able to be negotiated. But the further someone is away from age 65 (the age at which they can enroll in Medicare), the more difficult it may be to find affordable coverage over time.2

How much will you miss out on employer-matched 401(k) contributions?

There’s more than salary to consider when exiting the workforce. Many employers offer retirement benefits and match employee contributions up to a certain percentage. Not only will your client miss out on those matching dollars, they’ll also likely miss out on any gains those added funds might accrue in time.

After age 59½, your client may begin taking money out of their 401(k) without early withdrawal penalties, but they need to consider how much that account could have potentially still earned had they (and their employer) continued to contribute rather than withdraw for the next few years.3

Additionally, even though there are hardship provisions for younger workers to withdraw up to $100,000 from their retirement account penalty-free as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, it may not be in their best interests, especially since it must be contributed back within three years.4

Will there be repercussions for not accepting the offer?

If your client’s company is trying to reduce its labor force due to financial difficulties, turning down a generous offer now could backfire if it leads to an eventual dismissal or company closure in the future. There’s no way to know whether such an outcome will occur, but it bears consideration.

The long-term economic effects of the global pandemic are yet to be realized, and your client’s employer may not know where the company stands financially or how a downturn in the economy or recession could impact their bottom line.

Encourage your client to consider their options carefully and, as best as they can, get a sense for the company’s solvency in the future. If an employer is encouraging voluntary retirement in the midst of financial hardships, it may just be the writing on the wall.

Times of uncertainty call for additional measures to stay in touch with clients. Some may not consider checking with their financial advisor to help them navigate such a major life decision. Reaching out to your clients during this time could be a welcome conversation and help bring clarity.

The current situation is just one more challenge your clients face as they approach retirement. Gen X: Gen Ready? is a guide we developed to help you understand this group and their unique challenges and expectations. Simply click the link below for your copy.

Gen X: Gen Ready? White Paper


1 Social Security Administration, Benefit Reduction for Early Retirement, no date

2, Part A and Part B sign up periods, no date

3 Internal Revenue Service, 401(k) Resource Guide - Plan Participants - General Distribution Rules, February 21, 2020

4 MarketWatch, Coronavirus stimulus-package tax relief: Withdraw $100K from your IRA — and repay in 3 years with zero tax liability, April 6, 2020


Topics: Retirement Planning