In just a few weeks, approximately 2,800 Eli Lilly employees will receive an early retirement incentive offered through Lilly’s Voluntary Early Retirement Program, or VERP. For Eli Lilly employees evaluating the current VERP, this post comes a little late–applications were turned in a couple of weeks ago and those accepted into the program will find out around November 1st. But, this is not the first time Eli Lilly has offered an early retirement incentive, and it probably won’t be the last. There will also be other companies offering similar VERPs in an effort to reduce their workforce, so this post should help for future early retirement opportunities.
Getting “paid” to retire early seems like a no-brainer, but it is an offer that should be carefully evaluated. For some, the timing of an early retirement incentive will be ideal–falling right in line with their planned retirement. However, for most, the offer will move the retirement finish line up a few year, and although a few more years of retirement doesn’t sound too bad, there are a number of considerations to be made prior to accepting an early retirement incentive.
Important Note: If you are evaluating an early retirement incentive and have not been working with a financial planner, I cannot stress the importance of meeting with a professional to help analyze the decision in front of you. There is more to consider than the financial incentive of a VERP (as you’ll see below), and a financial advisor can help you evaluate the impact of an early retirement on your personal situation.
When evaluating participation in a Voluntary Early Retirement Program here are some important things to consider:
When I left the corporate world, I did not appreciate the value of employer-sponsored health benefits. It wasn’t until I started my own company and had to pay the full premium that I realized how good I had it with benefits. My employer paid the majority of the premium, there were low deductibles and out-of-pocket maximums, and coverage that was not limited to Indiana. The expense of healthcare is one of the main reasons people continue to work because it can be a huge burden on a budget. If you are retiring early, health insurance coverage and the expense associated with it is one of the most important factors to evaluate.
It is common for retirees to have the opportunity to remain on the employer health plan while paying 100% of the premium. Some VERPs will provide an incentive to help with the cost of health insurance, but this is not always the case. Be certain you understand where you will get your health insurance coverage and what the expense will be, and confirm your financial plan will be able to absorb the additional monthly expense.
In addition to health insurance, group life insurance, long-term disability, cancer policies and other supplemental coverages should be evaluated. These do not always carry over to retirement, and it is important to make sure you understand which benefits you might lose and how that impacts your financial plan.
Less Time To Save For Retirement
It’s no secret the majority of Americans are underprepared for retirement–they just haven’t saved enough. The acceptance of an early retirement incentive will end your retirement savings early; not only will you be reducing your personal savings, but you will also be ending the matching contributions from your company. Depending on your situation, the few years of saving you will forego may have a tremendous impact on your financial plan.
Typically, a VERP will include a lump sum benefit, which may make up for the amount you would have saved in the last few years of employment. It is important to review with your financial advisor the impact of ending your retirement savings early and if the lump sum benefit is able to offset the savings lost. Make sure you consider the lump sum will most likely be a taxable distribution, meaning you will not see the full amount due to income taxes being withheld. We will discuss other tax considerations later, but it is important to understand the full amount of the lump sum benefit should not be included in your evaluation. Be sure to account for taxes!
It may not seem like it, but a few more years of saving could outweigh the benefit of an early retirement incentive. It’s important to take this into consideration when evaluating if a VERP fits your plan.
Additional Years Of Retirement Income Need
Retiring early adds to the number of years your financial plan needs to fund. It’s impossible to know how long you will be in retirement, but adding additional years of income need can have a huge impact on your financial plan. Beginning the income phase of your financial plan early can lead to a shortfall of retirement savings later in life. Be sure to rework your financial plan to incorporate the additional years of income needs, along with the additional expenses we discussed earlier to make sure your financial plan does not weaken.
Not only does an early retirement increase the number of years you need to fund, but it may also impact your ability to pay down debt prior to retirement. The expenses of the debts that are not retired before you retire need to be considered in your income planning as well.
As you can see retiring early can lead not only to more years to fund, but a higher income need in the early years of retirement leading to a shortfall later in life. Be sure to analyze how these factors impact your plan to see if retiring early is right for you.
Additional Benefits To Pension (If You’re Fortunate To Have One)
When most pension benefits are calculated, your number of years of service is part of the equation. By reducing the number of years in the calculation, you could be lowering your pension benefit, which can lead to a significant reduction in expected lifetime income. If your pension is negatively impacted by retiring early, it is doubtful any lump sum offered will offset the income sacrificed. It is not difficult to calculate the potential impact on your pension and the lifetime income might lose by accepting an early retirement incentive. Luckily, some VERPS actually offer an increased pension to offset the years lost by retiring early, so be sure to understand how the program impacts your pension benefit.
Another pension consideration is your eligibility. Would an early retirement impact your eligibility or the age you can begin drawing your pension?
No two programs are identical, which makes it critical to understand the impact on your pension and how it affects your financial plan.
Impact on Social Security
Social Security benefits are impacted by your earnings, and presumably, the last few years of your career will be some of your highest earning years (not always, but most of the time this is true). You should take into consideration what the impact an early retirement will have on your Social Security benefits.
In addition to the impact on the monthly benefit, retiring earlier than planned may adjust your Social Security strategy. An early retirement may require taking Social Security earlier than planned leading to a reduction in lifetime income benefits.
Be sure to reevaluate your Social Security strategy prior to accepting an early retirement incentive.
As I mentioned earlier, if a lump sum is part of the VERP you are offered, it will most likely be a taxable distribution. Not only will the taxes reduce the amount you will actually receive to apply to your plan, but it can have other implications. It can impact your taxes in the year it is received, lead to quarterly taxes, and impact your Medicare premiums down the road. Prior to accepting an early retirement incentive, it is important to collaborate with your financial advisor and CPA to create a plan to address any tax implications you will experience–evaluate the use of your 401(k), 529 plans, and IRAs to lessen the tax burden of a lump sum.
Your CPA can also make sure you have the proper withholdings on the lump sum to prevent a surprise tax bill.
Since taxes are such a tricky subject, this is where I reiterate consulting your CPA in addition to your financial advisor.
If your financial plan supports accepting an early retirement incentive, it is time to make sure you are mentally and emotionally ready to retire. That may seem like a silly statement; of course, you’re ready to retire–everyone is racing to the retirement finish line, but experience has taught me retirement is not always an easy transition.
Like most things in life, everyone processes retirement differently. There are individuals who have no problem easing into retirement without giving the career they are leaving a second thought. Meanwhile, there are individuals who struggle with an identity crisis early in retirement. After thirty year plus years of working, their identity is tied to their career, which is no longer a part of them in retirement. For some, it can be a challenge to find a purpose in retirement, and accepting an early retirement incentive can make the transition more challenging.
Part of the final years of planning for retirement involves discussing ways to fill the void left by no longer working, and retiring earlier than planned may not provide the opportunity to finalize these details. As you evaluate the financial aspect of a VERP, be sure to take time to think about what you will do in retirement to feel fulfilled.
Will you find a part-time job to continue to be around others while making some extra money? Will you consult? Volunteer? What will you do to give you a reason to get up each morning and get moving? It’s been my experience those who retire TO something have a more satisfying retirement than those who do not. What will be your “something”?
Participating in a Voluntary Early Retirement Plan can be an exciting opportunity, but it is a decision that should not be taken lightly. It should not be a decision made on emotion; instead, it should be made after reviewing your financial plan, discussing the financial and emotional implications of an early retirement with your financial advisor, and confirming the benefit offered is adequate for your personal situation.
This is a once in a lifetime decision and you need to make sure you get it right.
Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimer page.