Severance & Early Retirement Payout Options

Early retirement buyout packages can include severance payments, medical support, bridge payments, or continued salaries. If you’re asking yourself, “Should I take a severance retirement package?”, it’s important to consider factors like your age, retirement savings, healthcare access, and potential tax implications. In this post, we’ll break down these options to help you make an informed decision.

An early retirement payout is an offer from employers for employees who are approaching retirement age. The incentive for companies is typically to avoid layoffs or firings, whereas the incentive for employees is to get a payout option that can cushion their retirement plan.  

• Severance Retirement Payment: A severance is a payment made by the employer to the employee when they leave employment unwilfully, typically upon termination. Severance pay is typically a benefit rather than a requirement. It is usually a part of an entire severance retirement package, which may include several items on this list.
• Post-Retirement Medical Support: As a part of some packages, an employer may offer to cover medical expenses until you’re eligible for Medicare at age 65.
• Bridge payments: Sometimes, an employer may offer “bridge” payout options for early retirement, which provides temporary benefits until you reach age 62, when you start qualifying for Social Security.
• Lump Sum – An early retirement lump sum payout is an offer from your employer of a large payment, usually a week’s worth of pay times your number of years with the company. There are drawbacks to this large income, naturally.
• Continued Salary: Some companies will offer to provide your normal salary for a set period of time, such as a year or six months.
• Accrued Paid Time Off (PTO): In addition, another part of your severance retirement package may include compensation for accrued vacation or sick time.

When considering your retirement payout options, you’ll likely want to consider the following factors:

• Your Age: The age between 60 and your “full retirement age” (which is usually around 67) is usually when most will consider retirement. Before that age, you should expect to pay early withdrawal penalties. After, you will likely need to start taking required minimum distributions from your IRAs.
• Current Retirement Savings: The later you wait, the more time you’ll have to save, in theory. But you’ll want to speak with an accountant and/or financial planner to gauge your ability to maintain your lifestyle using your current assets.
• Your Access to Benefits: If you’re under the age of 65, you are not eligible for Medicare yet. It’s highly recommended that your severance retirement package includes some support in that regard. For instance, will you be eligible for COBRA coverage?
• Potential Tax Penalties: Large income payments are still taxable, and early withdrawals can have huge penalties. Know the rules (and exceptions) for early withdrawal before you turn age 59.5.
• Your Lifestyle: Don’t underestimate the emotional aspects of retiring. Ask yourself if you’re ready to fill the hours, whether it be with volunteering, reducing work hours, or working part-time somewhere else.
• Other Consequences: Many employees feel an understandable pressure to take an offer, because saying no can have cultural consequences at the company. Also, the first offer tends to be the best. That being said, depending on the position, company, and culture, some negotiations may be possible. Also, many employees move towards offering consultancy services to their previous employers and others as a part-time option.

Your age will be possibly the most important factor, following your current financial preparedness. Keep these milestones in mind.

• Age 59 ½ – This is the age that you will be eligible to take tax-deferred savings without early withdrawal penalties from several different types of retirement plans.
• Age 62 – Social Security has both the age you can start taking out retirement out, which is 62, and your “full retirement age,” which depends on when you were born. Waiting until your full retirement age ensures that you will get more benefits.
• Age 65 – This is the age that most people can sign up for Medicare.
• Age 67 – This is the “full retirement age” for social security for those born in 1960 or later.
• Age 72 – For most IRAs, you will need to start taking required minimum distributions (RMDs) at this age.

The most important factor is whether you can afford to retire even with a large payout. Retiring early depends on your income and spending plans. To plan, estimate your yearly living expenses for early retirement. Remember, expenses may change later. Early on, you might still have a mortgage, education costs, and health insurance. Use worksheets to estimate your income, expenses, and see if early retirement is affordable.