What You Need to Know-New Beginnings to Endings
In our current economic environment, large companies are reacting to the ripple effects of the last recession and the trade war fallout. Unfortunately, they are responding by eliminating positions and offering early retirement and termination packages to many employees. These offers are being directed toward employees who are not yet at retirement age, enticing them to their package before their positions are terminated. If you’ve received one of these offers and you’re over age 40, you have 21 days to consider your offer per federal law.
An Early Retirement Package Usually Includes:
• A large sum of money equal to a number of weeks (or months) of wages and other benefits such as health insurance for some extended weeks or months.
• Ability to rollout your 401(k) or stock option pension to another plan, such as an IRA, to manage yourself.
While employees are rewarded with generous early retirement packages, they are often faced with risks including paying unnecessary taxes, early withdrawal penalties, and higher health insurance premiums. If they have no additional household income, they’re likely to run out of money within their retirement. They also will lose their employer matching contribution to their retirement plan, free employer perks, and low health insurance premiums.
Employees experiencing this career struggle face liquidity risk, especially if most of their liquid assets are saved in their deferred retirement plans and they are not qualified for the IRS penalty free withdrawal. Otherwise, the employee is faced with a 10% penalty and ordinary income tax, unless the retirement assets are in a pre-taxed plan like a Roth IRA which has been established for more than 5 years.
Higher insurance premiums can be expected until they go on the Medicare plan at age 65 or added to their spouse’s health insurance group.
Consider the Following Tips:
• If you’re 55 years of age or older, you may want to take the package. The withdrawal penalty is usually waived if you leave your employer.
• Join your spouse’s health insurance group (usually at year-end for the next calendar year).
• Continue looking for another job with better compensation and benefits than your current job.
• Carefully review your social security filing option prior to collecting Social Security benefits. Collecting benefits at age 62 will result in a higher reduction of your benefits.
• You can choose to do nothing and take your pension payment, stock option (or a lump-sum if offered) or 401(k) benefits at your normal retirement age. With this option, you’re at the mercy of the retirement plan administrator your former employer has selected. This may not be in your best interest if you’re unable to meet with them or easily make changes to your investment options.
Employee terminations and these types of offers are likely to continue as companies and our economy moves toward recovery. I invite you to meet with me for a complementary consultation to help you review your package, assess your financial goals and make your decision. –Tahar Mjigal, Managing Member, COO, Varsity Capital Management
Varsity Capital Management, LLC dba Varsity Capital Management is a registered investment advisor in the State of Texas. This article is intended for informational purposes only. Varsity Capital Management does not give legal or tax advice, consult your own legal and tax professional.