Getting out early How to Size Up a Company Offer IF YOU ARE READY, AN EARLY-RETIREMENT INCENTIVE PACKAGE CAN BE AN EXPRESS TICKET TO FREEDOM. BUT BE SURE IT WILL CARRY YOU FOR LIFE.
(MONEY Magazine) – In December 1987, the benefits department at GPU Nuclear in Parsippany, N.J. made Raymond Russo, the utility's 59-year-old director of facilities, an irresistible offer: an instant 37% boost in his pension, a check for three months' salary, and lifetime coverage under the company's health plan. All he had to do was retire within 45 days. Though he was not planning to leave his job for three more years, Russo sat down with his accountant to figure out whether the offer, plus earnings on his savings, would cover his anticipated expenses in retirement. Says Russo: ''I realized that I could retire right then without taking anything away from my life style.'' So today, instead of poring over construction proposals for GPU, Russo travels with his wife Dusty, golfs and -- not to lose touch entirely with the commercial world -- sells homes for a local real estate agency. ''I was perfectly happy at my job when the offer came,'' says Russo, ''but I'm glad I took it.'' For hundreds of thousands of management-level employees like Russo, the golden handshake has replaced the gold watch as a token of retirement farewell. Employers see voluntary retirement offers -- more formally known as early-retirement incentive packages or ''windows'' because they are typically available for only a limited time -- as an effective and relatively humane way to cut payroll costs. Though the packages have become somewhat less common now that the mid-1980s wave of corporate downsizing has subsided, a recession could bring them back en masse: nearly a third of the executives queried last year by the American Management Association said they would offer an incentive package next time they needed to shrink their managerial work forces. For some employees, the packages are a windfall that suddenly fast-forwards the dream of financial independence into one's fifties or early sixties. For others -- those less financially and psychologically prepared than Ray Russo -- an early-retirement offer is a temptation all too often accepted in haste and repented at leisure. One reason is that the packages are complicated and can look more generous than they really are. Worse yet, companies generally give you only a few months to weigh the difficult financial and emotional issues of retirement -- adjustments that you might otherwise have made over a period of years. If an early-retirement offer does show up on your desk, review it with a financial planner or accountant. This is one instance in which the counsel of an experienced financial adviser will be worth every penny it costs. At the same time, however, making a sound decision requires you to ask the right questions of your employer, your adviser -- and yourself. Be sure you cover these areas:
-- Evaluating a Package
First, find out the circumstances of the offer. What will happen if you reject it? After all, the incentive window may be the prelude to a reduction in force in which you will be laid off anyway or transferred to a less desirable job. ''Ask yourself whether you will look forward to coming to work after the window period,'' advises Larry Fowler, a Seattle accountant and financial adviser. If not, there may be little point in turning down the offer, whether you are ready to retire or not. For example, Dean Sible of Kalamazoo, Mich. learned four years ago at age 55 that his job as public affairs director with Consumers Power of Michigan was being eliminated. The company offered Sible a choice between an early- retirement package and a less attractive position as consumer affairs director. Though Sible had no intention of retiring early, he chose the package. ''The prestige in the new job wouldn't have been as great,'' he explains, ''and my salary probably would have been frozen.'' Now Sible is convinced he made the right choice. As part of the retirement offer, the company sweetened his pension by 35%, awarded him a $40,000 severance check and extended his employee medical benefits for life. ''I have as much spendable income now as I did while I was working,'' he says. ''It was a super offer.'' To find out what is behind the company's offer, you may have to do some independent sleuthing. Odds are your boss will not make any forecasts of what will happen to you if you reject the package, especially if the outlook is bleak, for fear of seeming to coerce you into accepting the deal. One clue: Is the offer widely available -- say, to all employees 55 and older with 10 years of service -- or is it limited to those at one plant or in one department? In general, the narrower the window, the more it presages significant changes for < those who remain. If you determine that you really are free to take the offer or leave it, examine the package itself more closely. The majority of early-retirement incentive offers adjust the company's basic pension formula to give you a higher benefit than you would otherwise receive by retiring early. A basic formula, for example, would reduce your monthly benefit by 5% or so for each year you took off before the plan's normal retirement age, typically 65. An incentive package might reduce or eliminate this early-retirement penalty. That alone could boost the pension available to a 60-year-old early retiree by 33%. A company might also plug what are known as bonus years into an employee's pension calculation. This spring, for example, Unisys offered to figure early retirees' pensions as if the employees were two years older than they really were and had worked for the company two years longer than they really had. That would have increased the pension of a 60-year-old retiring after 20 years with a salary of around $40,000 by about 25%. About half the offers include a lump-sum severance payment. The award could be, for example, a flat six months' or one year's salary for everyone who accepts the package. Or it may vary according to your length of service. In a 1986 package, for instance, Hewlett-Packard gave employees 55 and older with more than 15 years' service half a month's salary for each year they had worked for the company. Some companies also offer a subsidy for retirees under 62, the age at which you can begin collecting Social Security. Under this provision, the company agrees to pay you an amount equal to all or part of your projected Social Security benefit until you are old enough to collect it from the government. An important but often underrated feature of the most generous packages is continued medical benefits. Federal law already requires your employer to carry you in its group health plan at your expense for at least 18 months after you leave work. But some programs allow you to stay in the plan at the same subsidized rates you received as an employee until Medicare kicks in at age 65. A few companies also extend coverage under their group term life insurance policy until you hit 65, after which benefits begin to taper off, eventually disappearing by age 70. If you are inclined to accept a package that omits a benefit you would like, ask for it. Terms may be more negotiable than you realize. ''Often employers aren't trying to cut corners; they just haven't thought of everything,'' says Steve Vernon, a consulting actuary in the Los Angeles office of the benefits consulting firm Wyatt Co. For example, if you want more time to make up your mind or if you want to keep a fringe benefit such as medical insurance that is not part of the package, you might be able to arrange it. ''One of the worst mistakes employees make is to suffer silently, assuming nothing can be worked out,'' says Vernon. To help you evaluate a package, companies typically compare the offer with the benefits to which you would be entitled if you retired now without the incentives. By that standard, most packages look positively magnanimous. But a more useful comparison may be between the package and what you could expect if you stayed in your job as long as you originally intended. That will tell you what you are giving up in return for leaving early. (For an example of such a comparison, see the table on page 40.) And you almost certainly will be sacrificing something. Says Manuel Castells, a partner in the Fort Lee, N.J. benefits consulting firm Kwasha Lipton: ''No incentive package is going to be as valuable as continuing to earn a paycheck.'' There are a couple of reasons for this, none of which your employer is likely to point out. One is that your 401(k), stock-ownership and other retirement savings plans stop growing when you retire and the balance is paid to you. At many companies, your annual contributions to these savings plans plus your employer's can easily exceed 10% of your salary. The earnings on your account can also be substantial, depending on the investment performance and the size of your balance. Bountiful as a severance check may seem, it can rarely compete with a few more years' worth of contributions and compounded earnings in your savings plan. As for your pension, even a sweetened early-retirement payout is likely to look stingy compared with the one you could expect if you continued to work. That's because at early retirement, your pension is likely to be based on the average of what you earned in your most recent three to five years rather than your presumably higher salary in the future. Most likely, not even a generous allocation of bonus years to your pension formula will make up the difference. Suppose, for example, your company's package credits you with five extra years of service -- considered a generous bonus. For a 60-year-old covered by a typical pension plan for 25 years, that could increase the pension by as much as 60%. Nevertheless, if you kept on working for five years and received 5% raises annually, your pension would be 110% higher.
-- Evaluating Yourself
After reviewing an incentive package, you may decide that the extra years of leisure are worth the reduced pension. In that case, the critical issue is not how well the package compares with age-65 retirement benefits, but whether it is sufficient to meet your retirement income needs. To answer that, you have to examine yourself. Think about the standard of living you would need to be content in retirement. Be honest. ''A lot of people say that they can live at a reduced standard of living in retirement, but when it comes time to cut back, they can't,'' says James H. Wilson, a Bristol, Tenn. C.P.A. and financial planner. (For help in making an accurate estimate of your living costs in retirement, see the story covering this subject on page 14.) If you intend to work after leaving your present job, your incentive package and other savings need not supply all your retirement income. Indeed, many early-retirement offers include out-placement counseling for those tempted to accept the package but not yet ready to leave paid employment. But again, be honest: If you are a scientist or engineer with readily transferable skills, for example, you may have no trouble landing a new job. But if you are a middle manager, you will probably find yourself competing against younger, less expensive workers in the open market, where your former chief strength -- your knowledge of your ex-employer's corporate culture -- counts for little. (For more on working in retirement, see ''The Truth About Post-Job Jobs'' on page 73.) If the package is adequate to pay for your retirement, one question remains, perhaps the most crucial of all: Are you psychologically prepared to leave work? Incentive offers tend to arrive without warning, and a two- or three- month window is usually too short to prepare for an entirely new life. Ideally, before you even consider accepting an early-retirement offer, you should have cultivated either a network of possible employers or an activity that will sustain your interest during retirement. After all, unless you are ready to retire, not even the most lucrative incentives can spare you the disorientation and aimlessness that many retirees experience. Last winter, for example, architect Gerry Malnati of Hanover, Mass. took early retirement from Polaroid at age 62 after 22 years of service. The package left him financially secure, but Malnati -- who now is toying with the idea of setting up an architectural consulting business -- says the hard part is adjusting emotionally. ''You look forward to your retirement,'' he says, ''but then you wake up the next day and wonder, 'What have I done?' ''
CHART: NOT AVAILABLE CREDIT: Source: Kwasha Lipton CAPTION: Does it pay to stay? Even a generous early-retirement package, such as the hypothetical one out lined below, provides less retirement in come than you could get by working until your company's normal retirement age. In this example, a 60-year-old manager with 25 years of service and an annual salary of $50,000 receives an early-retirement offer that includes these sweeteners: 1) Elimination of the early-retirement penalty in his pension formula 2) A two-year pension supplement equal to two-thirds of his Social Security benefit at age 62 3) Five years added to his length of service in calculating his pension The inducements will boost his early-retirement income to a maximum of $29,800 a year. But even so, his income would still fall short of the $39,100 he would retire on were he to work until age 65, assuming he received raises of $2,000 a year and con tinued to contribute 3% of his salary to a company- sponsored retirement savings plan such as a 401(k). The reason is two fold. First, his higher final salary and longer service at age 65 would entitle him to larger benefits from both his pension plan and Social Security. Second, the extra years of savings and compounded tax-deferred growth would lead to a larger payout from his company's savings plan.