In this episode of ThimbleberryU, we tackle the complex and often surprising situation of receiving an early retirement offer from your employer. Amy walks us through the essential considerations when navigating such an offer, emphasizing that while the initial reaction may be shock or panic, taking a step back to calmly assess the situation is crucial.
The first point Amy makes is that understanding the details of the offer is essential. It’s not just about a severance payment; early retirement packages might also include healthcare benefits, stock options, and other perks. A deep dive into these aspects is necessary to fully understand the implications, especially regarding taxes and retirement accounts. For example, lump-sum payments could push someone into a higher tax bracket, impacting overall cash flow. Additionally, unvested stock options and healthcare subsidies could significantly affect the offer's true value. Therefore, thoroughly reviewing the package over time ensures that all questions are addressed before making a decision.
Amy also discusses evaluating the risks of turning down an offer, such as the possibility of forced retirement or layoffs in the near future. For some, making the decision themselves—rather than waiting for the company—can provide a greater sense of control and ease of mind. We also explore the financial side: big payouts often mean big taxes, and drawing from retirement accounts prematurely could result in penalties. Amy explains that, for some clients, continuing to work may not improve their retirement outlook due to the high tax burden on their income.
Beyond the financial, the emotional aspect of this decision is key. Amy emphasizes the importance of aligning the offer with personal lifestyle goals. Is this a chance to change careers, pursue a passion project, or even relocate to be closer to family? For some, taking the offer can provide a sense of relief and new opportunities, while for others, the sacrifices may not be worth it.
Ultimately, the decision to accept or decline an early retirement offer should be made with long-term happiness in mind. It’s not just about the money—it’s about living the life you want, both now and in retirement. Amy advises listeners not to let fear drive the decision and to seek expert guidance to navigate these complex choices.
Jon Gay (00:07):
Welcome back to ThimbleberryU, I'm Jon Jag Gay. Amy Walls from Thimbleberry Financial joins me as always. Welcome, Amy.
Amy Walls (00:12):
Hey, Jag, it's good to talk to you.
Jon Gay (00:14):
Today, we're diving into something that can often catch people off guard: what to do when your employer makes you an early retirement offer.
Surprise! It can be a tough situation to be in, right?
Amy Walls (00:26):
Absolutely, it can be hard. It's a major life decision, and for many people, as you mentioned, it can feel like a surprise. It's a shock. On top of that, what to do isn't always a straightforward choice.
Jon Gay (00:40):
Sure.
Amy Walls (00:40):
Because sometimes, turning down the offer might mean facing a forced retirement in the not-too-distant future. It's challenging.
Jon Gay (00:47):
I can say that here in Detroit, I know that one of the TV stations, they offered a lot of their top talent early retirement packages, and some took it, and some didn't. But with the state of media, specifically, right now, the risk to them was, “Okay, if you don't take this offer now, we can't guarantee that you might not be subject to layoffs down the road.”
Amy Walls (01:08):
Yeah, there's a major international tech firm, September 30th, had people retire or leave early, not on retirement. So, these offers were basically blanketed to everybody to take, and within the next week or two weeks, everybody else finds out if they're being cut.
Jon Gay (01:30):
Geez, it's scary stuff. So, let's start at the beginning here. When someone gets an early retirement offer, what should they think about first? What's the first place to go mentally, emotionally, psychologically?
Amy Walls (01:43):
I'm glad you asked it that way. First thing I'm going to say is take a big breath or a couple big box breaths because feeling overwhelmed or blindsided is completely normal, and give yourself some time to sit and process before jumping to any conclusions.
Jon Gay (02:05):
Exactly. It's such a major life decision, you don't want to go like that.
Amy Walls (02:09):
Absolutely. Second thing is, once you are in a calmer place, it's understanding the offer’s details. And this doesn't mean just skimming them. It means getting into it, setting it aside, coming back to it to make sure as you've thought of more questions, you make sure you have the answers.
Jon Gay (02:30):
This isn't clicking, “I accept the terms and conditions.” This is a lot more important than that.
Amy Walls (02:34):
Yes. When I say understand the offer’s details — this offer may include more than just a severance payment. Here, we're talking about early retirement. We can apply most of what we're talking about to also a voluntary layoff.
There are differences of course, but it might not just be a payment for you to retire early. It may be healthcare benefits, it may be in the case of tech, maybe equity compensation, these are important things. Are the payments spread out or are they going to happen all at one time?
Jon Gay (03:11):
There's tax implications there too, right?
Amy Walls (03:13):
Absolutely. And there's tax implications to all the different forms of payments that may be coming to you. Like for example, some may actually supplement a retirement plan, like you may be able to include some contribution in a retirement plan, but not others.
If we have stock, what's happening with your unvested stock? If for example, some of your stock is eligible to vest at retirement under a certain schedule, is that the same (it should be) under an early retirement offer? But maybe they've enhanced some of those provisions.
Enhancing could look like making them all vest at once, which again, creates a bigger tax bill.
Jon Gay (03:58):
Sure.
Amy Walls (03:59):
What benefits will continue for what time? So, we touched on health insurance, is this going to continue? Is COBRA going to kick in? Are they going to pay for COBRA? Are they giving you a subsidy for health insurance coverage? What does that mean?
Another thing that comes to mind is evaluating risks.
Jon Gay (04:18):
Sure.
Amy Walls (04:19):
We talked about that maybe this means bigger layoffs, an involuntary layoff. if you don't take it. So, it's important to just recognize that declining the offer doesn't necessarily mean you stay employed, but it doesn't necessarily mean you're going to lose your job either.
One thing to consider is how that choice mentally will affect you. Some people are going to do much better if they make the choice themselves versus the company makes the choice.
Now, there is a way (and I know people who have done this) to say, “Actually, I kind of would like to make this choice for voluntary retirement and I'm going to decline this first offer because they may make this choice for me in a couple months and I'd be okay with that, but at least, I'm going to get a couple more months of pay and I'll have a little more time to figure out what I want to do. And sure, if I don't get this big payout, cool, but I can always look for another job.”
Jon Gay (05:17):
This goes back to something we talk about every episode, and that's the psychology behind it: what you're comfortable with.
Amy Walls (05:21):
Yeah, knowing yourself, knowing how you're going to react, and then really evaluating the impact of that severance if there is one. I'm calling it severance for early retirement. If there's a big payout, what does that do for you? Is it really retirement money? Is it going to hold you over for a period?
If it's early retirement, does that mean that you never go to work again, or this is going to buy you some time to do something different, or more of the same somewhere else? What is it that's valuable to you?
Jon Gay (05:58):
The key takeaway I'm getting from all these factors you're talking about, Amy, is that it's not about just what's in front of you now, but what could happen later? What should people consider next after these initial thoughts?
Amy Walls (06:10):
Yeah, it's how do all of those thoughts align with your lifestyle goals? Think about the kind of retirement you've envisioned. Now that this offer is in front of you, does accepting or declining the offer help you live the life you want?
Another thing in there is does accepting that offer, if it means changing your lifestyle, still make that offer beneficial. So, what I mean by that is I was planning to retire in five years, I just got an early retirement offer, I could retire now, but I'm going to need to reduce the amount that I'm planning to spend in retirement by 20%. Can I do that? I figure out I can. “Do I want to do that?” is the next question.
Is this worthwhile? Does this enhance my life enough to make that worthwhile? Well, you know what? That's pretty cool to get out of the rat race, and I'd love to go work at a bookstore part time, that sounds really fun and enjoyable and stress-free, and I know I'll have some flexibility to still travel and do other things I want to do, and that'll help increase some of that income that I would otherwise be losing.
Yeah, that actually seems pretty cool and doable. I'm for this. Or absolutely not. I'm not going to get what I want, it's not worth it.
Jag, you asked, “What should people consider next?”
In these offers, something that I have heard before is, “Well, I think maybe I should take it, and I will look for another job.” And interestingly, in the evaluation, we discover that the person with the offer is actually better off not going and finding another job.
Jon Gay (08:05):
What do you mean?
Amy Walls (08:06):
It's an interesting dynamic and it doesn't happen all the time, but it's come up several times in my career as an advisor, where working longer isn't helping the retirement picture, when that is the primary goal. And why I say that is, income is high enough, the taxes are high enough that there isn't a benefit to continue working except to maybe pass money on to heirs.
Jon Gay (08:35):
This is why it's so important, and I know you and your team do this with all of your clients, look at every individual situation. When the variables come in, there's no cookie cutter here. This is how this applies to your specific situation.
Amy Walls (08:46):
Yeah, absolutely. It's shocking for people when that is the result. Actually, you're better off retiring now, you're going to have more to spend in the way the numbers work out, and where we can draw money from and what accounts, if you were to continue to work and save, where you're going to be saving money. So, without there being a benefit, retiring now is better.
And the relief (this is one of the shocking things) that people feel, especially when you're someone who never really saw yourself retiring or was going to have a hard time making the decision that now's the right time.
It’s I think one of the moments I love most in my job, and like I said, it's come up a handful of times where that conversation gets to happen. So fun and exciting.
Jon Gay (09:36):
Oh, I'm sure.
Amy Walls (09:37):
Another consideration would be if there's any big red flags. So, what I mean by that is if it means you're going to be relying heavily really on other savings if layoffs happen or if you take the offer that's going to drain down a certain bucket that's going to decrease flexibility in retirement, that could be an issue.
Jon Gay (09:59):
Fair. Well, let's talk about the financial side specifically, Amy, since this is your wheelhouse. What should people think about when weighing the financial impact of an early retirement offer?
Amy Walls (10:09):
Well, Jag, you hit the nail on the head earlier when you called out, “Aren't there tax applications?” Absolutely. This is number one. Big payouts often mean big taxes. So, a lump sum payment could push you into a higher tax bracket leading to a bigger tax bill and less cashflow or less money in the bank than what was expected.
There may be possible tax strategies. Could you spread out these payments over a couple of years to ease the tax burden? Some people are going to have more flexibility than others, especially like if they're selling a business. Can you direct some of the payments to any type of retirement account?
And then also with tax considerations when we talked earlier about selling stock, that's capital gains. So, if you have a big payout and taxes go up, are you now getting hit with a higher capital gains rate also on the sale of stock?
Jon Gay (11:04):
So, those are the tax implications. I've got to imagine these are going to impact retirement accounts as well, these offers.
Amy Walls (11:09):
Yes, absolutely. So, let's say you get this offer and you're under age 59 and a half, tapping into a 401(k) could mean you're going to pay penalties.
So, does the money that you're getting paid out minus taxes at the new rate leave you enough to get through until you can access retirement plans without penalties? Or are you going to be okay paying penalties? That might be okay too.
You're missing out on potentially contributions (and this is true most of the time) to retirement accounts, and that means extra potential growth. So, stopping work early can have a long-term effect there. So, it's important to run those scenarios to actually understand what money will be where (more than likely, there's no guarantees) at different times to know that you will have the right money in the right spot.
And then it's not your retirement account, but your emergency fund. How does having a cushion or lack of cushion going into evaluating an offer impact your decision-making? You may need that cushion, and if you don't have a big one to cover healthcare costs upfront, or maybe this is now the time that you need to cover home repairs because you're not working at home, you've got the time and energy to let those repairs happen.
Jon Gay (12:35):
You're starting to go into my next question, Amy. You've talked about a lot of the pitfalls and things to consider. There might be some upside opportunities to an offer like this, right?
Amy Walls (12:45):
Oh, absolutely. And earlier I talked about how exciting it is when I get to have that conversation with a client that, “Hey, actually you're better off taking this offer than you are working.” That's one upside.
But maybe it's that you're pretty burnt out, and this is giving you an avenue to find somewhere new that you fit, whether that's in a new career or really, pursuing a hobby you have a passion for. And I think those things, they recharge us.
Jon Gay (13:15):
For sure.
Amy Walls (13:15):
Maybe it's doing some consulting or freelance work, and it's giving you a ramp to explore how that could go. It's also a great time to reevaluate lifestyle. Is the lifestyle you're living really the lifestyle you want?
We've talked about Jag, the difference between when we're working full-time and what we're doing, versus when we're on vacation, even if it's a staycation and what that looks like — taking a break can help reset.
Other opportunities may be, “Oh gosh, this is a good time for me to relocate. My parents are in a different place, I want to help them. I now have a good opportunity to do this and do things that are really meaningful.”
Jon Gay (13:57):
So, Amy, we've covered a lot of the pitfalls in here, some of the potential opportunities as well. What are some key takeaways you want to leave listeners with today as we think about a decision, if this kind of comes at you out of the blue.
Amy Walls (14:08):
Number one Jag, it's about your long-term happiness. This decision isn't just about money, it's easy to think it is. It's about living the life you want. It's the reason that we save money, we grow money so that we can have a happy lifestyle now and in the future. So, that's number one.
Number two is not to let fear drive the decision. It's easy to feel pressured, especially if these offers are rampant within the company you work for. There's lots of rumors and lots of, “But I'm looking at it this way, you need to too, you shoulds.”
No, it's about making the right decision for you and your own future.
Three, and of course, as a financial advisor, it would make sense for me not to say, “Get expert help.” I turn to colleagues when I need help on certain things. I turn to experts in certain areas of my life. We're about to do a basement remodel, we're not doing it ourselves. We're turning to the experts.
And plan for the best and prepare for the worst because you don't know what life's going to throw at you.
Jon Gay (15:14):
And you can do that with the help of an expert like Amy Walls at Thimbleberry Financial. Amy, if our listeners want to talk to you and your team about their overall financial strategy, or all of a sudden, they get one of these offers and they panic and they need to talk to somebody who has a lot of experience in the space, how do they best find you?
Amy Walls (15:29):
They can reach us online, thimbleberryfinancial.com or by giving us a call at (503) 610-6510.
[Music Playing]
Jon Gay (15:40):
Good stuff as always, Amy. We'll talk again in a couple of weeks.
Amy Walls (15:42):
Sounds great, Jag. Look forward to it.
Jon Gay (15:44):
Securities offered through registered representatives of Cambridge Investment Research, Inc, a broker-dealer, member of FINRA/SIPC, advisory services through Cambridge Investment Research Advisors, Inc, a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.
Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions.
Securities offered through registered representatives of Cambridge Investment Research, Inc, a broker-dealer, member of FINRA/SIPC, advisory services through Cambridge Investment Research Advisors, Inc, a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.