10 Tips for Evaluating an Early Retirement Offer

Carefully weigh your retirement finances before accepting a buyout.

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When companies are looking to reduce the size of their workforce, they sometimes try to entice workers to give up their jobs through buyout offers or early retirement incentives. At first glance, it might seem appealing to get a cash bonus or a year’s salary for not having to go to work. And buyouts generally seem more humane than mass layoffs. Still, you should consider early retirement offers very carefully before signing on the bottom line. Here are 10 things to take into account:

Consider the company’s financial health. Assess the likelihood that you'll be able to keep your job if you turn down the buyout offer. Linda Chisom, 64, a faculty assistant in Cambridge, Mass., is considering accepting an early retirement incentive package of one year’s salary and retiree health insurance until Medicare coverage kicks in at age 65. “You have to be 55 or over and have to have worked here for 10 years or more,” she says. “I’ve been here for 27 years.” Chisom originally wanted to retire at age 66, the year she can claim full Social Security benefits. “[But] there’s also the possibility of getting laid off in the future, which would mean you don’t get that one-year salary,” she says. “It feels like going to Las Vegas. You’re just not sure what the outcome is going to be no matter what you do.” If you are over 40, under the Older Workers Benefit Protection Act, you must be given 21 days to consider a severance offer. So take your time and think it over.

Calculate the financials. Compare the financial incentive being offered to benefits you would have received in retirement if you had stayed at your job. “Many employees who leave their jobs under company-sponsored early retirement plans discovered later that they don’t have enough income to support themselves very well,” cautions Jonathan Pond, a financial adviser and author of Safe Money in Tough Times: Everything You Need to Know to Survive the Financial Crisis. Many pension formulas are calculated based on the average of what you earned during your last few years on the job. A one-time bonus isn’t likely to be higher than working longer and having more higher earning years factored into your pension calculation.

Cover your expenses. When you retire, you need to have a plan for paying your expenses for 30 years or more into the future. Chisom says she would lean toward taking the buyout if she could reduce her monthly expenses by selling her house. But she's having trouble doing that right now. “I’m engaged and I’m hoping that my fiancé and I will be able to buy a house together once we sell our separate residences, and that would help defray some cost of living expenses if we bought a house together," she says. The bottom line: A buyout offer needs provide enough to cover your bills going into the future.

Make a counteroffer. If a buyout is offered because a business unit is being closed or an entire department is being eliminated, you may not have a lot of room to ask for a better severance package. But if the company offers an early retirement package to only a few people, there's more room for discussion about the terms. “I believe every aspect of a retirement package is at least potentially negotiable,” says Alan Sklover, an employment attorney in New York and author of Fired, Downsized, or Laid Off: What Your Employer Doesn't Want You to Know About How to Fight Back. “If you can, make a rational argument as to why the terms you would like them to change is in [your employer’s] interests.” For example, Sklover suggests that you offer to spend the next six months bringing in more clients or business in exchange for a larger payout. It can’t hurt to ask for a little bit more money or subsidized health benefits.

Find healthcare. Make sure that an early retirement incentive package provides health insurance if you are younger than age 65 and can’t yet qualify for Medicare. “Everyone over age 50 probably has at least one health condition that is going to prevent them for getting affordable [individual] coverage,” says Lita Epstein, author of Surviving a Layoff: A Week-by-Week Guide to Getting Your Life Back Together. Epstein, 56, pays $1,200 a month for her individual health insurance with a $3,000 deductible, due to arthritis and high blood pressure, she says. If your employer doesn’t offer health insurance, consider COBRA continuation coverage, which generally lasts for up to 18 months, and find out if you're eligible for coverage under a spouse’s health insurance plan.