Should You Accept an Early Retirement Package?

If you’ve been offered a retirement package, how do you decide whether or not to take it? That question haunted Jenny for the last 12 months.

Her employer was forced to reduce staff and offered Jenny and a number of other long-term employees an early retirement package (he didn’t know how to run a successful small business). What made the decision even more difficult was the 15% bonus the employer was offering for anyone who retired and selected the lump sum payout. The only catch was they had to make their decision prior to December.

The Particulars

Jenny works part-time and brings home $1,700 net. If she agrees to retire early, she could take a lump sum of $200,000 or a lifetime monthly income annuity of $1,700 (before tax). Since Jenny has no children or dependents, she has no interest in leaving behind any money. Since she’s been working at the same place for more than 20 years, she has no interest in starting over with a new employer or being self-employed.

The lifetime monthly income is starting to look attractive.

Jenny is 70 years young. She loves her life and likes her job. She really doesn’t have a strong reason to retire, but she is interested in that 15% bonus. If she decides to take the lump-sum after December, that $200,000 will be reduced to $170,000. Jenny feels pressure to make a decision now.

Jenny’s Process:

The first thing that Jenny needs to do is calculate if the retirement lump sum is more attractive than the monthly lifetime annuity payments.

The best way to do that is to determine how much income she could generate if she takes the $200,000 and invests it. If Jenny could earn 5% on that $200,000, she’d earn $10,000 a year or a little over $800 each month before tax.

If she takes the monthly annuity payments, she’ll receive $1,700 per month. After tax, Jenny would put $1,400 in her pocket. Even after tax, the monthly income gives Jenny a lot more than the lump sum. Those annuity payments are looking better all the time.

Normally, I wouldn’t recommend taking the lifetime income payments, but this is a special case. First, Jenny is going to receive a payout of more than 10% on her money. (The monthly payments of $1,700 come to an annual payment of over $20,000. If you divide $200,000 by $20,000 you will see that her payout is 10%).

Second, she doesn’t care about leaving a pot of money to her beneficiaries. She wants to enjoy her life now. Also, she has other capital and doesn’t need random access to this particular pool of money. The lump sum doesn’t really appeal to her.

Finally, in this day and age, getting a 10% payout and not having to worry about the stock market is very attractive.

Should she retire now or wait?

Since she’s not going to take the lump sum, she doesn’t have to make any decision right now. This was an important realization to make. It relieved a great deal of pressure and allowed Jenny to think more clearly.

Should she stay or should she go?

Jenny could retire and take home $1,400 or continue working and take home $1,700 per month. In other words, Jenny works 15 hours a week for $300 per month. Not a lot of money.

Why the smartest decision is to keep working despite the low financial incentive.

Even though Jenny’s not making much money for the time she puts in, she gets a lot out of her job.

First, she enjoys being helpful to the people she works with and the clients she serves. She also has a great social circle at work, which is invaluable to her.

Next, Jenny already has plenty of free time. She doesn’t complain about needing more. If she retired, she’d enjoy the time but would miss the professional interaction at work.

Of course, the best situation would be for Jenny to retire now and then be re-hired later on. That way, she could collect her monthly annuity income and her paycheck. Double whammy! But the situation at work is not secure now. She has no guarantee that she’ll in fact be rehired if she retires. By delaying her decision, she might find that her firm will be in a better situation in the future. If that happens, she might retire at a time when her employer would rehire her shortly thereafter.

Times are uncertain now. By staying on at her job, she can always quit but if she were to retire, she may not have the option of finding other work.

Have you been faced with a similar dilemma? How did you decide which direction to take? What would you suggest to Jenny?