Pensions: Early Retirement Offers
By: Source: AARP.org Date Posted: 2005-03-20 12:09:00
If you are over 40, your employer must give you 45 days to decide whether to sign an early-retirement offer that other employees also receive. Spend your 45 days doing some careful planning and calculating. Your package may look like a good deal, but retiring early could rob you of more pension benefits than you think.
What You Should Know
Evaluating the Offer
In most pension plans, employees with large salaries and many years of service receive the most lucrative pension benefits. If you retire early, you may be losing out on both fronts.
Let's say you're 55. You could retire now and receive a pension that is based on the number of years you've worked for the company and your current salary. Or, you could turn down the early-retirement offer and work for 10 more years.
If you decided to retire 10 years from now, you would receive a higher pension benefit than if you retired today. That's because your pension benefit at age 65 would be based on more years of service. If you receive salary increases during the next 10 years, your pension could climb even higher, since your salary at age 65 would be higher than it was at age 55.
This isn't to say that early retirement is never a good idea. To be sure what your package means to you, think carefully about these important questions:
- How much money will you lose? Will the pension you take today be significantly smaller than the pension you could take at your full retirement age?
- What extra benefits does your retirement package include? For example, will you still be covered by your company's health insurance plan if you retire early? Having health coverage until you qualify for Medicare would be an important benefit.
- How risky is it to stay? Is there a chance that you could lose your job if you turn down the early-retirement offer? If so, staying may not be worth the risk. If you can find another suitable job, you might choose to retire early and invest your retirement benefits for the future.
Social Security
If you retire early, will you need to begin receiving Social Security benefits before your "full retirement age?" That's the age when you are eligible to receive your full Social Security benefit. Depending on the year you were born, your full retirement age could be 65, 66, or 67.
Anyone who qualifies for Social Security can begin receiving Social Security benefits at age 62. But if you begin receiving your benefits before your full retirement age, you won't receive your full benefit each month. To make up for the additional months you'll be receiving benefits, the Social Security Administration (SSA) permanently reduces your benefit when you retire at age 62. As a general rule, early retirement will give you about the same total Social Security benefits over your lifetime, but you will receive smaller amounts each month. This allows SSA to stretch your total benefit over a longer period of time.
For More Information
Keys to Early Retirement
Janine Latus Musick, a veteran writer on personal finance, health and family matters, has written the article "Six Keys to a Great Early Retirement," which is posted on the Microsoft Network (MSN) Web site. The article discusses issues that you should think about before deciding on early retirement. These include your pension pay-out, Social Security benefits, inflation, mortgage, projected living expenses, and what you plan to do with your time after retirement.
URL: http://articles.moneycentral.msn.com/RetirementandWills/RetireEarly/6keysToAGreatEarlyRetirement.aspx
Social Security Administration
The Social Security Administration (SSA) Web site can tell you how early retirement will affect your Social Security benefits.
"Social Security Retirement Benefits" is a complete guide to retirement benefits published by SSA. The booklet includes one section about early retirement. To get a copy of the booklet, call 1-800-772-1213 and ask for Publication No. 05-10035. Or, view the booklet online at the SSA Web site.
URL: http://www.ssa.gov/pubs/10035.html#1082132
Social Security Full Retirement and Deductions by Age Chart
URL: http://www.ssa.gov/retirechartred.htm
Normal Retirement Age for Social Security and the Effects of Early or Delayed Retirement provides the normal retirement age for people born after 1937 and explains the formula used to reduce Social Security benefits for those who retire early. It also provides information about the Delayed Retirement Credit that you receive if you retire after your normal retirement age.
URL: http://www.ssa.gov/OACT/ProgData/nra.html
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