Should You Consider Early Retirement in a Recession?

Laveta Brigham

A growing number of companies are offering workers cash this year to walk away from their jobs—a daunting prospect in a recession. Often called early retirement, voluntary severance or buyout packages, such deals often target people with seniority, a group that tends to earn higher salaries. Taking such an offer […]

A growing number of companies are offering workers cash this year to walk away from their jobs—a daunting prospect in a recession.

Often called early retirement, voluntary severance or buyout packages, such deals often target people with seniority, a group that tends to earn higher salaries.

Taking such an offer can be a no-brainer for some workers, including those who are ready to retire or change jobs, or fear for their companies’ survival.

“For people close to retirement who are well prepared financially, it’s a gift,” said Matt Hylland, an adviser at Arnold & Mote Wealth Management LLC in Hiawatha, Iowa.

But for many others, deciding whether to stay or go is a complicated and emotionally fraught decision that may require weighing the risks of two unappealing options: giving up a paycheck when jobs are scarce or clinging to an insecure job without any guarantee of severance if layoffs continue.

Adding to the pressure is the generally tight deadline to make a decision. Under federal law, employees often have up to 45 days to consider such an agreement, plus seven days after signing in which to change their minds.

Since March, several employers have extended these offers, including

Delta Air Lines Inc.,

Boeing Co.


Coca-Cola Co.

and Dartmouth College.

Here’s what to consider and how to adjust your financial plan if you take a buyout offer.

Is it a good offer?

The first step is to understand the offer.

A typical severance payment might amount to two weeks of pay for every year of employment, up to a cap such as six months, said David Kudla, CEO of Mainstay Capital Management LLC in Grand Blanc, Mich.

Under a federal law known as Cobra, companies with 20 or more employees generally must allow departing workers to stay enrolled in the health plan, typically for up to 18 months. But while many firms subsidize workers’ premiums, they can require former employees to pay up to the entire premium, plus 2%.

Some firms offer outplacement services or accelerated vesting of stock options, said Dana Kravetz, an employment lawyer at Michelman & Robinson LLP. If a buyout is aimed at older workers with pensions, the employer may let them start benefits at a younger-than-normal age or retain a higher benefit, despite working fewer years.

When a buyout is offered to a group of employees, there is generally little room to negotiate higher severance unless you have a strong legal claim, such as a whistleblower, sexual harassment or discrimination claim, said Mr. Kravetz. (Companies generally pay severance only after employees sign waivers releasing them from legal liability.)

Should I take it?

The next step is to project the impact of taking the package on your finances.

Typically, the closer you are to retirement, the more likely it is that a buyout will make financial sense, said Scott Dauenhauer, a financial adviser in Murrieta, Calif. In 2017, Mr. Dauenhauer advised his mother-in-law to take an early-retirement package offering her almost full pay to leave her teaching job one year early.

More Advice

In the years after taking a buyout, those who temporarily find themselves in a lower tax bracket may benefit from converting some money from a regular IRA or 401(k) to a Roth account, said Matt Hylland, an adviser at Arnold & Mote Wealth Management LLC.

While you must pay income tax on the money you convert, the key is to keep the conversions small enough to stay within the lower tax bracket.

Once in a Roth account, the proceeds can grow—and generally be withdrawn—tax-free in retirement. In addition, money you spend from a Roth 401(k) or Roth IRA doesn’t count toward your taxable income.

“It wasn’t a slam dunk,” he said, adding that she would have earned a little more by staying, plus an extra $240 per month in pension benefits. “But she felt it was worth it, plus she had a whole extra year that she didn’t have to teach,” he said.

For many others, though, buyouts may not make much sense.

Indeed, Mr. Dauenhauer said that if his mother-in-law had been five years from retirement, he would have advised against it.

“It would have been a big hit to her pension and a lot of the severance would have been devoured by health-insurance premiums” for private coverage, since she wasn’t eligible for Medicare yet, he said.

Doing the math

Consider whether the severance is likely to last until you find another job or reach your desired retirement age. Include in your budget any extra you will spend on health insurance or income tax, since the severance payment might push you into a higher tax bracket.

Then estimate the potential hit to your retirement income.

“Accepting a buyout offer can mean lower Social Security benefits, lower pension benefits, and increased early 401(k) withdrawals,” said Mr. Hylland.

If you put your 401(k) contributions on hold or have to tap your retirement savings early to make ends meet, estimate how much less you are likely to amass for retirement. (Remember that you will owe income tax on withdrawals from a traditional IRA or 401(k), plus generally a 10% penalty if you are under 59½—or 55 in the case of many 401(k) plans.)

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If you are entitled to a pension, ask your company for the projected benefit assuming you leave now. “Fewer years of service often mean lower benefits,” said Mr. Kudla.

There may be consequences for your Social Security as well.

The Social Security Administration’s annual statement estimates benefits by assuming you continue to earn your current salary until you reach one of three retirement ages—62, 70, or so-called full-retirement age, which is 67 for people born after 1959.

The formula takes an average of the 35 highest years in your earnings history, adjusted for wage inflation before age 60, “so if the last few years are zeros, it can lower benefits,” said Mr. Kravetz. To assess the impact of taking a pay cut, enter your own estimates of future income in the online benefits calculator at

Revamping your retirement plan

If you decide to take the offer, consider ways to minimize potential damage.

Social Security increases its payouts by 6.7% to 8.3%, plus an additional increment for inflation, for every year a beneficiary between ages 62 and 70 refrains from collecting a check, according to Bill Reichenstein, a professor emeritus at Baylor University and a founder of Social Security Solutions, which sells advice on claiming Social Security.


What advice would you offer to others about taking early retirement? Join the conversation below.

“A guaranteed 8% annual boost from delaying Social Security is tough to match,” said Mr. Hylland, who recommends putting off claiming, even if that means tapping retirement accounts or a pension early.

For married couples, it may make sense for the lower-earning spouse to claim benefits early, while the higher-earning spouse delays, said Prof. Reichenstein.

Write to Anne Tergesen at [email protected]

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