By Kerry Hannon
If you’re offered an early retirement package, really scrutinize it. Buyouts are often complicated and not cookie-cutter. Most are negotiable to some extent, too.
You have to truly understand what the deal is that’s being offered, says Dennis Notchick, a Certified Financial Planner for Stratos Wealth Advisors in San Diego. That goes beyond how much money you’ll receive, which is often related to your tenure with your employer.
“Is it a lump sum? Is there an annuity option, lifetime income payments?” Notchick says. A lump-sum buyout can balloon your income for the year which can result in a significant tax bill. If you can take the payments in stages, that could lower your IRS bill.
If you are married, you’ll want to pay special attention to the payout rules.
“Sometimes a person will take a lifetime income payment, but if they die, their spouse gets nothing. Sometimes a survivorship benefit of fifty percent or two-thirds is an option,” says Notchick.
To immunize yourself against future tax rate hikes due to federal deficit spending, Notchick says, you may want to use some of your early retirement money to open a tax-sheltered Roth IRA.
Be sure to review any medical coverage, too. A typical offer includes one year of health coverage.
Access to an employer health plan might be something you can negotiate for an extended period of coverage.
When job-based plan coverage ends (and you’re not yet eligible for Medicare), you can usually continue enrollment for up to 18 months — sometimes longer — under a federal law known as COBRA, which stands for the Consolidated Omnibus Budget Reconciliation Act. It requires firms with at least 20 employees to offer this option.
Normally, you have up to 60 days to elect COBRA and another 45 days to pay the first premium (covering the period dating back to your coverage loss). But if you’ve been laid off or furloughed due to the pandemic, a recent federal rule gives you more time to decide about COBRA.
The date to elect COBRA now begins March 1 (the end of the COVID-19 “outbreak period”) and will end 60 days after whenever the government ultimately declares the COVID-19 emergency over. So, according to NPR, if you were laid off in April and the COVID-19 emergency ends Aug. 31, you’d have 60 days beginning Aug. 31 — the end of October — and then the regular 60-day COBRA election period after that.
So, people laid off because of the coronavirus outbreak have at least four months, maybe more, to decide whether they want to elect COBRA.
The drawback: COBRA premiums are steep. Figure on something like $600 a month per person or more.
“Finally,” Notchick says, “is long term care of concern? Are you currently covered by a long-term care policy at work? If so, can you keep it when you retire? And is it worth keeping?”
Determine your retirement income sources. Carefully review your anticipated income (Social Security benefits, pensions, distributions from personal investments and savings) and expenses (weekly, monthly and yearly budgets).
Many major mutual-fund companies have retirement calculators on their sites that can help you with this exercise.
“Focus first on guaranteed sources, such as Social Security and pensions. Then calculate your monthly cash needs from investments,” Adi says. “If you are fortunate to have a pension, evaluate your payout options and determine if your pension payment adjusts for inflation annually.”
The Social Security Administration website can let you get an estimate of your future Social Security benefits and a record of your lifetime earnings history.
If you’re married, you’ll need to determine when it’s best for each of you to start claiming Social Security. “Do you need to trigger both you and your spouse’s Social Security policies when you retire?” Notchick asks. “Can you take one or both later and let it increase?”
The AARP website has a useful Social Security benefits calculator .
Plan your withdrawals from savings and investments. A conservative annual drawdown of retirement savings may be to take 3% the first year, and to adjust for inflation after that.
If you’ve been fortunate enough to have saved $1 million, for example, plan to withdraw $30,000 in the first year and to increase that amount by the rate of inflation in the second year and beyond.
Some financial advisers stick with the 4% rule for retirement withdrawals.
“Evaluate your annual expenses and multiply this by 25,” Connell says. “This will give you the amount of money you must have order to qualify for standard 4% withdrawal rate and not run out of money.”
If you’re not taking an early retirement offer with health coverage and are thinking of retiring before 65, be sure to take health insurance into account. You won’t yet be eligible for Medicare, so health insurance will be a huge consideration.
Also on MarketWatch: Where should I retire?
If you have a spouse who is still working, you may be able to tap into health coverage via his or her employer. Otherwise, look into Affordable Care Act options through healthcare.gov or your state’s marketplace.
At 59, I currently shell out around $800 a month for a health insurance plan that has a high annual deductible: $7,500.
Talk to a financial adviser. An expert can help you work through your early retirement puzzle. I recommend working with a fee-only financial adviser, rather than one who charges commissions. And look for one who is a fiduciary — which means this pro puts your interests first.
Some databases to search for a certified financial planner: the nonprofit Certified Financial Planner Board of Standards, the National Association of Personal Financial Advisors, the Financial Planning Association and Wealthramp.com.
Kerry Hannon is the author of “Never Too Old to Get Rich: The Entrepreneur’s Guide to Starting a Business Mid-Life.” She has covered personal finance, retirement and careers for the New York Times, Forbes, Money, U.S. News & World Report and USA Today, among other publications. She is the author of a dozen books. Her website is kerryhannon.com . Follow her on Twitter @kerryhannon .
This article is reprinted by permission from NextAvenue.org , © 2020 Twin Cities Public Television, Inc. All rights reserved.