Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, March 25, 1991 TAG: 9103220977
SECTION: BUSINESS PAGE: A-7 EDITION: METRO
SOURCE: MAG POFF BUSINESS WRITER
DATELINE: LENGTH: Long
Suddenly, you have the option of joining the leisure class 10 years earlier than you had projected.
But the company has given you only a month or two to decide whether you can - or should - grab the incentives and walk out the door.
For people close enough to the traditional retirement age to have done some planning, a company's bonus to get out early is probably very attractive. Others, especially those lacking such underpinnings, may want to pass up the deal.
There's no single answer; only questions apply to everyone facing that critical decision. Some of the questions are fairly obvious, according to Andrew Hudick of Fee-Only Financial Planning Inc., such as who will pay for health insurance, and for how long. That's the priority question to ask, Hudick said.
A collateral question: If your spouse is younger and covered by your company's insurance plan, who pays for that protection when your coverage is under Medicare?
Do you have insurance that would cover nursing homes, home health care and the like? What will it cost?
Retirement benefits are generally calculated on the basis of length of service, final annual salary and age.
Hudick said people whose companies offer to add extra years of service and additional years to their age should ask what the resulting retirement income would equal as a percentage of current salary.
Does the pension have a cost-of-living adjustment? Many plans don't.
Hudick said retirees, especially those leaving at a relatively young age, must consider how they will cope with the effect of inflation eroding their spending power. At a modest 5 percent inflation rate, he pointed out, a dollar today will be worth only 61 cents in 10 years, 48 cents in 15 years and 38 cents in 20 years, unless the pension increases to offset price increases.
Hudick said people considering retirement must find out how the pension coordinates with estimated Social Security benefits. Ask if the size of the pension drops when Social Security kicks in?
Also, people who have stock options at work should find out how long they will last, Hudick said.
He said people thinking about retirement must draw a budget to determine their exact income needs.
"If you were spending 100 percent of your salary the day before you retired," Hudick said, "you certainly cannot live on less the day after retirement without some preparation."
Next, potential retirees must do their estate planning, Hudick said, writing wills, powers of attorney and living wills.
If people receive a lump-sum pension distribution, he said, they must determine whether to roll over the money into an IRA or to elect five or 10-year forward averaging for tax purposes. They may or may not be eligible for the 10-year option.
Timothy McGough, a consultant with Hewitt Associates in Richmond, said employees weighing an early retirement option are concerned about two major questions. One is whether their savings plans, pension and Social Security will provide enough money to maintain a standard of living, McGough said. The other is medical insurance and how much it will cost, especially for employees who might retire between the ages of 55 and 60.
So when he designs employee benefits plans for businesses, McGough tells them workers are unlikely to accept early retirement unless the company offers medical coverage continuing until Medicare eligibility.
At 55, McGough said, age alone makes it hard to find coverage at affordable rates. If the worker's family has health problems, he added, it may be impossible. Most employers are required to cover departing employees at the workers' expense, but only for 18 months.
Despite the problems, McGough said early retirement "can be win-win situations" if the package contains the right financial incentives.
The employer ultimately profits by leaving a retiree's job vacant, he said. "If someone has to go, this is more compassionate than layoffs."
Hudick and McGough agreed that factors other than money must be considered.
"Are you emotionally able to retire?" Hudick asked. "Do you have hobbies or outside interests that do not involve your work, job, profession?"
Hudick said people "need to prepare mentally for retirement. Most people cannot just walk away from a position where they have spent 20 to 40 years of their lives."
McGough said that "a day can be a long time if you don't have interests to keep you going." He said a person may need 10 years to develop a lifestyle of outside interests, volunteer activities and hobbies.
And if an early retiree's spouse still is working, McGough asked, "what do you do with your time?"
Another factor companies consider is the potential for a layoff or salary freeze if too few people accept its retirement deal. A salary freeze would cap further growth of pension benefits.
Hudick said a company having financial difficulties may "simply lay you off if enough people do not `retire' early."
McGough agreed that layoffs might follow if a company is over-staffed or experiencing financial problems.
He advised people considering a retirement deal at such a company to weigh their own contributions to the business and the value of their jobs.
Some factors may be beyond control of the individual worker, McGough said, so you have to ask if your division or even the whole company is performing well. For example, people who assemble cars, he said, are at risk because of a poor auto sales market, not because of their own performance.
Hugh Sawyer, a certified public accountant and certified financial planner, said many people supplement their retirement income by taking part-time jobs.
Sawyer said the demand for part-time employees is growing because they don't earn fringe benefits, making them considerably less expensive to employ. Many people continue in their former fields, he said. In effect, they are filling their own former positions in their spare time while the employer avoids paying for costly benefits.
by CNB