What to think about if you are offered early retirement
The negative economic impacts of Covid-19 are felt by many employers and reducing operating costs has become a key priority – the main one being reducing their payroll.
Thus, one strategy consists in offering employees who are a few years away from retirement the possibility of taking early retirement, possibly without the usual penalties imposed for the premature collection of their retirement funds.
If you are an employee in your mid-fifties, this can be an attractive option. You have worked hard for many years and the idea of having more free time can be very appealing.
Be careful, however, not to make an ill-considered decision, as there are many things to consider before giving your notice of early retirement.
Retirement needs a plan
Most people don’t think about retirement until they’ve already entered it. Planning is of paramount importance and financial planning is at the heart of the big decision you are faced with.
Here are some questions to answer, well before you leave your workplace for good:
- Did I save enough during my working years?
- Is my employee pension fund the only retirement savings I have accumulated?
- How much monthly income will my retirement savings provide after I retire?
- Who depends on my income now?
- Who will depend on me financially in the future?
- Is the house I own fully paid for?
- Am I debt free?
- I am healthy now, but what if I get sick or develop a chronic illness or have a disability – what should I do then?
- At work, I have a goal, focus, and tasks that fill my day. Will I have a new goal as a retiree?
We know people are living longer now than in previous generations, so chances are you will live past 80. Perhaps the most important question for people facing retirement is: will my retirement savings last as long as I do? Before making decisions that change your life or your finances, the answers to these questions will inform your decision making.
Your list of things to do before you retire early
1. Look at your household budget. This means evaluating all the expenses incurred in your home – essential costs of living such as groceries as well as luxury items such as entertainment. In every budget there are fixed costs that are unlikely to change whether you are working or not.
An example of this is that maybe you are paying tuition or college fees for your children, or you are still paying debt service. These costs can exist for many years. So a regular review of your budget is essential.
Consider that your monthly retirement fund income is likely to be less than your current monthly income. As a retiree, you may be able to save on costs such as fuel, but also consider new costs that may be incurred, such as your private medical assistance that may have been included in employee benefits before at work.
2. Think about who depends on you financially and how long you will have to support them in the future. Your spouse cannot be employed; you can still have children in school or university; you may have a disabled child; or you can have unemployed or laid off adult children that you support. These dependents should be factored into your planning.
3. Know how much retirement savings you are losing by taking early retirement. You would be surprised how much you could lose in savings, even if you retire two or three years earlier than expected.
4. Consult a financial advisor. If you don’t already have one, appoint a qualified and licensed financial advisor to help you make some of these decisions.
If you do decide to opt for early retirement, there is little room for mistakes or bad decisions about investing your money. The expertise of an advisor will go a long way in enabling you to invest and retire with confidence.
In addition, they are not emotionally attached to your money and therefore will help you make fact-based decisions, objectively considering your unique needs, your appetite for investment risk and your lifestyle.
5. Decide how you are going to spend your time. Taking a dream vacation is one option, but it can only last a while. Many retirees complain about boredom in the first six months of retirement.
They have so much time with little activity to fill it. Perhaps consider creating a new source of income using your skills, or find a hobby, or consider volunteering in your community.
There are many organizations serving the needy who could use your skills and expertise. It’s about finding a new goal and living it with confidence.
Dinash Pillay, National Director of Business Development at Glacier by Sanlam
* The opinions expressed here are not necessarily those of the IOL or the titles sites