Early retirement occurs when an employee decides to retire before the age at which he or she becomes eligible to collect retirement resources such as Social Security, a company pension, or distributions from a 401(k) or another retirement plan.
Options That Allow an Employee Early Retirement
Many scenarios exist that would allow an employee to retire early. These are some of the potential scenarios:
- Early retirement is an option for employees who have saved substantial financial resources aside from retirement accounts so they are unlikely to have to worry about money.
- Early retirement is also an option for employees who have developed multiple income streams. For example, an employee who works full time, but pursues website development, freelance writing, or photography as a second income, may develop the part-time business into a full-time career, or elect to continue to work part-time in early retirement. This works best when the employee has developed the income stream before retiring. For example, one couple retired, moved to an island, and opened a wine bar; however, they spent several years becoming knowledgeable about wine and saving money before retiring early.
- The employee decides that early retirement is possible because of a combination of substantial savings as well as a second income stream.
- In additional cases when an employee chooses early retirement, the employee makes the choice and knows that he or she must continue to work. Often, they are burned out in their current field and their saved resources allow them the option of working part-time or with a more flexible schedule.
Sometimes early retirees continue to work for their current employer but part-time and for part of the year. Depending on their field, this changed relationship can be an option. Other early retirees decide to pursue a job in a field that is different from their full-time career. Someone might have worked for years in higher education and education promotion, for instance, then, in early retirement, may begin working at a local church as a part-time administrator.
Employer Incentivized Early Retirement
Early retirement is also an offer made by employers who seek to cut costs and encourage highly paid employees to leave their employment by retiring early. Usually, the early retirement option is accompanied by financial incentives that add income to the employee's resources.
Sometimes the employer wants to make room for younger employees with fresh or, at least, different ideas—although, in this instance, beware of the possibility for charges of age discrimination.
The employer may want to promote employees so they gain experience in management or in lateral move jobs and thus build bench strength for the future. The employer may also offer to fund early retirements for purely financial reasons; they have too many employees for the amount of work that is available to do—for whatever reason.
But whatever the employer's reasons, whether financial targets, attrition needs, training for employees, or new employees, the early retirement offers must help them meet the targets they set.
The employer reaches its financial targets when the correct number of employees needed for streamlining the organization and cutting costs accept the early retirement offer. Employees who are offered early retirement need to carefully evaluate the employer's early retirement incentives in combination with their own savings and realistic additional income expectations and opportunities.
Employees Must Evaluate an Offer of Early Retirement
Only rarely will the employer's early retirement offer completely fund an individual's retirement expenses. Additional options, such as paid college tuition, often accompany early retirement offers, and must also be evaluated in the total equation.
In any case or scenario, early retirement offers must be evaluated with the entire employment picture in mind. If the employer fails to reach its intended workforce reduction targets, for example, employee layoffs might result. Early retirement offers from employers are fraught with alternatives that the potential retirees must consider.
For example, if insufficient employees accept the employer's early retirement offer, they need to understand that they could lose the incentives and their job anyway if they choose to stay employed on the job.
In the case of a layoff, an employee will generally receive a severance package, but early retirement incentives will not be offered or available.
Employees Who Receive an Offer of Early Retirement Should Seek Financial Advice
Employees who are offered early retirement incentive packages should talk with a financial consultant to determine their best and reasonable options and alternatives. They might also want to run their offer by an employee-side employment law attorney. They should also keep track of the number of employees who are choosing to take the employer's offer to best understand the potential scenarios that might await them, including a layoff.
The Bottom Line
It's tough to refuse the incentive and then, find yourself laid off anyway—without the incentives offered earlier. And, this can happen, so choose wisely in your best interests.