Early Retirement

Planned Early Retirement

You have been waiting to retire for quite some time. Early on, you prepared and built a sound retirement plan that included maximizing your retirement contributions and diversifying your investment portfolio. When your company offers you an early retirement package, the timing could not be better.

However, even though your early retirement is planned, there are some decisions you need to make before embarking on that long-awaited trip around the world. If you have not done so already, it may be wise to pay down debts and mortgages before you retire. Your home is an invaluable asset. You may decide to move into a smaller home when you retire, so you may want to consider selling your primary residence. The next section will provide information about downsizing your home.

Do not forget your spouse and/or dependents. Consider their life expectancy; will you need to support them or will they need to support you? Many baby boomers chose to have children later in life. How will education costs impact your early retirement decisions?

Evaluate your financial situation and make decisions about your retirement income accordingly. Your lifestyle and expenses in retirement will impact how you want to receive your retirement income and over what length of time.

Unexpected Early Retirement

There are a number of reasons some people are forced to retire early. One reason is because companies are trending away from long-term employment. The state of the global economy, a changing workforce, corporate downsizing or restructuring all mean companies have to be more elastic and cost efficient. The burgeoning expenses associated with keeping long-term employees mean more early retirement packages are being offered.

Retirement packages (sometimes called severance packages) are usually offered in the form of a cash payment, where the amount is based on the length of your employment. You may be given the option of taking the payment as a one-time lump sum or have that lump sum distributed over a period of time. Think of the latter as continuing to draw a salary. Consider the advantages and disadvantages of taking your retirement package as a lump sum or in installments.

Lump Sum Payment

• Possible tax deferral: Because a retirement package is considered income, you will be taxed on the amount you receive. If your employer agrees to defer your payment to the following year, it could buy you some time to assess your finances and diminish the impact the payment will have on your income tax filing.
• Debt repayment: Use the money you receive to pay down any one-time debts you may have. You could decrease the amount of interest you pay if the retirement package is generous.
• Guaranteed payment: If a company is in financial straits, it would be a better idea to receive your retirement package all at once.

Installments

• Possible tax deferral: Because you receive your retirement package in installments, you could defer paying taxes on the payments over a number of years. Also, with your payments being smaller, your taxes will be lower. As with lump sum payments, you must obtain approval from your employer.
• Debt repayment: Use your installments to support ongoing expenses or pay down longer-term debts.

What if you are not financially ready to retire?

Will you need to continue working to support yourself or your family? In this situation, you must analyze your cash flow and possibly re-adjust your current assets. It may take some time before you find another job, so your liquid assets and investments must become a source of income until you are working again. Try not to use your IRA savings as any withdrawal could impact your retirement savings when you will need them later, and draw tax implications. If you were contributing to a company defined contribution plan, you may want to transfer the funds to your new employer’s defined contribution plan if available, or give consideration to a rollover IRA.

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