Evaluating an Opportunity for an Early Retirement
The pandemic has hastened the retirement of some baby boomers, and the linked furloughs and layoffs in many industries have led others to wonder if a retirement transition might come sooner than they think. Buyouts became common last year as businesses cut costs. What if you receive one this year?
The first thing to remember is that you don’t have to retire when you are offered an early retirement package. If you can keep working for another employer after receiving severance pay, extended health benefits, or a pension from your old one, you might end up better positioned for retirement on your schedule and terms.
A buyout offered before you are eligible for Medicare can be problematic, as the Consolidated Omnibus Budget Reconciliation Act (COBRA) only lets you keep your employer’s health coverage for up to 18 months. (If you are married, you could try to enroll in the health plan at your spouse’s workplace as a workaround.)
Remember also that a sizable severance package, while wonderful to receive, also represents taxable income. You might want to ask your employer if they can distribute that money to you over multiple years, which could lower the risk of the payout taking you into a higher tax bracket.
Any buyout offer, at any age, should be carefully considered not only in view of the retirement savings you have amassed but also in view of your current and possible future income sources.
Time to Think About All That Free Time
Time is a gift, and when you retire, you’ll no doubt think about making the most of it. Would it be weird to make a weekly schedule for yourself in retirement, similar to the way you scheduled workweeks during your career?
Scheduling your time has its merits, at any age. It could help you stay productive on a day-to-day basis during your “second act,” whether you elect to work or not.
Want to calendar a tennis match or a little backyard landscaping? Why not? Calendaring fun or creative experiences can give you that little extra push to get them done, much like project management software does at work. These are the appointments you want to keep, and now, they are mostly fun.
You may find yourself so busy with part-time work, volunteering, clubs, and social gatherings that calendaring things becomes wise. Alternately, if you lack for activities once your career or business winds down, the empty calendar screen or calendar pages may lead you to muse about how you could make use of your greater free time.
On the Bright Side
At this writing, yields on certain U.S. Treasuries are above where they were for much of 2020. The yield on the 10-year note climbed back above 1% on January 6; it was at 0.55% as recently as August 6. The yield on the 30-year note pushed toward 2% last month, a level it had last seen in February 2020.
The interest income from a Treasury Inflation-Protected Security (TIPS) is exempt from state and local taxes. However, according to current tax law, it is subject to federal income tax. Adjustments in principal are taxed as interest in the year the adjustment occurs even though the bondholder does not receive the principal adjustment until maturity. Individuals should consider their ability to pay the current taxes before investing.
Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC. Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Lighthouse Financial, LLC and Cambridge are not affiliated.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.
1. AARP, August 28, 2020
2. Roanoke Star, January 13, 2021
3. U.S. Department of the Treasury, January 13, 2021