Early
Retirement, Can It
Be A Benefit CJr Hindrance?
Can You Afford Early Retire
ment?
Now that individuals over age 50
comprise the fastest growing seg
ment of ilie pupuiauon, the stan
dard retirement age of 65 is losing
ground to both early-and late-re
tirement options. Better health and
increased longevity often translate
into longer retirements and, quite
simply, when you retire earlier and
live longer, your savingx must last
longer as well.
Can you afford to retire? Beuer
yet, to retire early? With sound fi
nancial planning, you c;n sort
through the maze of retirement op
tions fully armed to make (lie most
of your retirement years. According
to the North Carolina Association
of CPAs, the key to smart and ef
fective retirement planning is to
star, as soon as possible so your re
tirement investments have time to
grow and so you won't feel the
strain of suddenly supporting your
self on a significantly reduced in
come.
Evaluating An
Early-Retirement Offer
In cost-reduction efforts, a grow
Keep in mind that if you retire before age
62, you are not eligible for Social Security
benefits until you reach, that age.
ing number of companies have
templed many employees with ear
ly-retirement offers. If you've been
faced with such an offer, or know
that one is in the offering, it's time
to ask yourself some hard questions.
For starters, are you ready to re
tire? If you do retire, how will this
affect your Social Security bene
fits? Will you have enough incomc
from savings, investments, pen
sions and the like to cover your ex
penses? If you tum down an early
retirement offer from your compa
ny, could you be laid off anyway?
Undoubtedly, some people have
no alternative but to grab the offer.
But even if you count yourself
among those who welcome the op
portunity to leave the work force,
make sure you understand all the fi
nancial ramifications.
Pensions
Pension-plan benefits are usually
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calculated by multiplying a per
centage of your salary by the num
ber of years worked for the compa
ny. For this reason, if you plan to
retire early, you may well end up
forfeiting some pension dollars. In
fact, many large companies reduce
pensions by as much as 50 percent
if you retire at age 55, while about
half will allow you to quit at age 62
without reducing your pension. In
general, therefore, it pays to work
until you reach the age at which
your employer eliminates or sub
stantially reduces the early-retire
ment penalty.
Today, many companies include
"sweetened pensions" in their spe
cial early retirement packages. As
part of these offers, the company
calculates your benefit by adding
three to five years to your age or
years of service. Botn can increase
your benefit by up to 30 percent
more than if you retired early with
out the "sweetener."
If you're under age 65, any offer
that will pay a pension benefit
equal to or better than that which
VOU would pet hv rplirina at nop 6S
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is worth considering, especially if
you're ready to leave the work
force. Also, keep in mind that by
the time you reach 60, if you have
been with your employer for a long
time, working additional years may
not result in a significant increase
in your monthly benefit.
Social Security
Many people still erroneously
believe that they can rely on Social
Security benefits to support them
when they retire. While Social
Security benefits and pension distri
butions can help you to meet your
monthly expenses, they may not be
enough for you to live in the
lifestyle you may have envisioned
for yourself.
Keep in mind that if you retire
before age 62, you are not eligible
for Social Security benefits until
you reach that age. And if you re
tire before age 65, your monthly
benefit is reduced permanently. You
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may be able to live with the reduc
tion in benefits if you have incoir.c
from other sources and if your em
ployer has nrovided you with a
generous benefit package at the
time of your retirement.
Life Insurance
The best early-retirement pack
ages offer you the same life insur
ance coverage that you enjoyed as
an employee. Some companies on
ly give you the option to switch
from the company's group-life poli
cy to an individual policy, which
can cost upwards of S400 per year
per S 10,000 of coverage. But this
can be more expensive than buying
your own policy elsewhere. If your
company offers you a death benefit
less than half of what you enjoyed
as an employee, be aware that this
may not be nearly sufficient to
cover the expenses of surviving
family members.
Health Insurance
Regardless of your age, if your
employer requires you to take an
early retirement, he is required by
law to continue your group health
insurance coverage for up to 18
months at your expense. Dental in
surance, however, generally expires
the day you retire.
The most attractive retirement
package enables you to keep your
employers health insurance cover
age for life. If this is true for you,
check to sec that the deductibles
and benefits remain the same for an
early-retiree as-for an employee.
Taxes and Other Considerations
Before deciding whether or not
to retire early, take a close look at
all your retirement savings ? in
cluding Individual Retirement Ac
counts, 4010c) plans, SEI's or
Keoghs ? and assess how much
you need to draw on these savings
to maintain your current lifestyle.
You'll also want to take a close
look at the tax implications of re
ceiving distributions from these
plans, as well as from your pension.
Most retirement payments are tax
able whether they come from your
IRA, an employee pension plan or
a disability plan. However, a CPA
can advise you on how to minimize
the tax bite when you draw on these
savings. Indeed, adopting the right
tax strategy can make early retire
ment more affordable and accept
able to you.
Money Management is a
column on personal finance pre
pared and distributed by the North
Carolina Association of CPAs.
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