Insights

Is Early Retirement on the Table?

Before deciding on your employer’s offer, consider the impact on your finances—and your lifestyle

By Kerby Meyers | September 18, 2020

At first glance, the offer seems enticing. Your company presents an early retirement package, featuring a lump sum payment and an allowance for health insurance. Perhaps it’s part of an effort to address the effects of the coronavirus pandemic by reducing payroll expenses.

It may, in fact, be a good deal, but before you decide to exit the rat race and ease into your golden years, it pays to do some heavy duty processing, said Kim Bridges, director of financial planning at BOK Financial.

“If you’re 64 and it’s just a couple of years until you already planned to retire, it could be a pretty easy decision,” Bridges said. “But for someone who’s 56 or 57, it’s a lot tougher.”

Bowing out 10 years early could put a strain on your nest egg, so it better be sizeable if you choose to take the leap.

There is much to consider: the financial implications, certainly; but also the impact of early retirement on your lifestyle.

Money matters

The financial side of the decision goes far beyond adding up your 401(k) plan and individual retirement (IRA) account balances, dividing by the number of years you expect to live on those funds—say, 30 years—and making a thumbs-up/thumbs-down decision.

A comprehensive financial plan begins with a clear understanding of where you stand, Bridges said.

For example, many shrug off tracking expenses while they’re working and, as a result, have no sense of how much they spend on a regular basis.

“You can’t risk getting that wrong,” she said. “If you think you’re spending $6,000 a month and you’re actually spending $10,000, that’s a big difference in your financial model.”

Similarly, a sober assessment of how your spending will change in retirement is a must. Visions of travel, hobbies, shopping and regularly dining out are common, but prone to underestimation in terms of costs.

“Pre-retirement, you spend 40+ hours per week making money, but in retirement, that time is typically used spending money,” Bridges said. “Inevitably, you spend more than you think you’re going to in those early years.”

More than the nest egg

Bridges cites three ways an early retirement may impact your financial plan more than you think:

  1. You will no longer be making contributions to your nest egg, losing those dollars along with the compound earnings they would generate.
  2. You will start drawing from your savings sooner, so you’ll need to cover more years of retirement spending with a smaller nest egg.
  3. Your Social Security benefits could be reduced, as the agency assumes work will continue until full retirement age, which can be as high as age 67. Years without an income could reduce your benefits, as does taking them before full retirement age.

The accelerated deterioration of savings isn’t the only surprise early retirement potentially holds. Health insurance is another.

Few people know the true cost of health insurance, Bridges said. Employers cover an average of 18% of premiums for individual coverage and 30% of family coverage, according to the Kaiser Family Foundation. Until Medicare kicks in at age 65, retired individuals must cover the full premium. Company rates extended through COBRA—the health insurance program that allows eligible employees and their dependents to continue benefits after leaving an employer—run high, too.

Additionally, surprises could lurk in the employer’s severance agreement, which may include a non-compete clause—an item of concern if you’re considering working for another employer or starting your own gig.

Could be worthwhile

Bridges likens the company-prompted early retirement decision to making a large discretionary purchase, such as buying a boat.

“If you hadn’t made an intentional decision to buy a boat in the first place, hearing about a sale on the boat doesn’t mean you should buy it,” she said.

Ultimately, Bridges said the key to a fulfilling retirement is flexibility.

If your household budget allows for core expenses to be covered by fixed-income sources such as Social Security or a pension, your retirement accounts will fund discretionary expenses and your spending may be adjusted as needed. If you roll into retirement without a mortgage or other significant debt, you’ll likely benefit from the lower fixed costs.

“If you had already made the decision to buy a boat—and determined it fits into your lifestyle and budget—and you walked into the dealership and learned the boat was discounted 30%, you would be ecstatic,” she said. “It already made sense, but given the new numbers, it was even better. That’s when it’s appealing.”

And if your early retirement package is outstanding—a true golden parachute—taking the leap can be liberating.