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early retirement

Should I Take the Early Retirement Package Offered at My Job?

As tempting as an early retirement package sounds, it’s a decision that should be made only after analyzing it carefully. What the early retirement decision boils down to is: “Can I afford to do it?”

AARP’s recent article entitled “What to Consider When You’re Offered an Early Retirement Package” explains that many early retirement packages include salary severance (such as receiving one or two weeks’ pay for each year of service); extended health insurance coverage and a pension-related payout.

However, just because you’re offered an early retirement package, it doesn’t mean you have to retire if you take it.

The first question is whether you’d consider working after taking your company’s early retirement offer. Taking a voluntary buyout when you plan to keep working is a different decision, than if you’re considering retirement. If you have a new job and will still be collecting a paycheck after the buyout, you might save some of that cash.

The analysis is more difficult when your future job prospects are poor, or you’re planning on using the voluntary buyout as retirement funds.

The older you are — and the nearer that the offer is to your planned retirement date — the better. If you are 63½ when you get a buyout offer, if you have enough savings, a well-stocked 401(k) or IRA retirement plan and no large debts, you’d be “within the window” to take the buyout. The reason is that you’re only 18 months from being eligible for Medicare health insurance at age 65. The Consolidated Omnibus Budget Reconciliation Act (COBRA) allows workers to continue their employer-based health coverage for up to 18 months. This applies even if the termination is involuntary. Most early retirement packages offer COBRA benefits. You’ll have to pay for COBRA, but it will be a bridge to age 65 when your Medicare coverage begins. See if you can get coverage by joining your spouse’s plan, if he or she is employed and has a plan at work. You can also shop for your own private plan through the federal government-run Health Insurance Marketplace. However, don’t attempt to go without health care because you’ll need it.

You’ll need money in retirement to pay your monthly bills. Therefore, you should do an expense audit and figure out what your monthly costs are now and what they’ll be in the future. Based on the expense audit, see if you’ve got enough income or assets to cover your budget.

Look at whether the buyout terms are attractive enough to let you to leave your job and bridge the income gap, until retirement age of 65 or you get a new job. If it doesn’t, you might be better off not taking it. A severance payment of six months to a year might give you enough time to find a new job, but for most, a month or two of severance won’t be enough.

Reference: AARP (Aug. 28, 2020) “What to Consider When You’re Offered an Early Retirement Package”

lower taxes to relocate

Some States are Lowering Taxes to Entice Retires to Relocate

The State of Maryland excludes from taxes up to $31,100 in income from pensions and 401(k) plans. However, its state and local taxes on other types of income—including distributions from IRAs—can run as high as 9%.

Kiplinger’s March article entitled “States Lower Taxes to Court Retirees” explains the good news for Marylanders willing to relocate, is that there are other states which give retirees a break. For example, Delaware and Virginia are both friendlier to tax-conscious seniors, according to Kiplinger’s state-by-state guide to taxes on retirees. Marylanders can move to Florida, which has no income tax and is on Kiplinger’s list of most-tax-friendly states.

To address his state’s image and tax issues, Maryland Governor Larry Hogan has introduced a bill that would eliminate state taxes on the first $50,000 of income for retirees making up to $100,000 in federally adjusted gross income. Therefore, retirees with incomes of $50,000 or less would pay no state tax.

Other states are also trying to find ways to keep retirees from heading off to lower-tax states. Illinois Governor J.B. Pritzker recently signed legislation that will make it easier for seniors in Cook County (which includes Chicago) to apply for a property tax break of up to $8,000 a year. Kiplinger has designated Illinois as one of the least tax-friendly states for retirees, mostly due to its high property taxes. West Virginia got a “mixed” rating from Kiplinger for the way it taxes retirees. They are phasing out taxes on Social Security benefits over three years. New Mexico lawmakers are considering several bills that would repeal or reduce taxes on Social Security. The Land of Enchantment also received a “mixed” rating from Kiplinger.

Here are the states where the most retirees are moving, based on the number of people age 60 and older who moved into a state versus the number of people who moved out.

State – Net Migration

  • Florida – 68,918
  • Arizona – 31,201
  • South Carolina – 12,001
  • North Carolina – 9,209
  • Nevada – 8,582
  • Tennessee – 8,259
  • Texas – 8,296
  • Washington – 3,964
  • Idaho – 2,966
  • Delaware – 2,605

Source: Smart Asset analysis of 2017 census data

Whether you’re planning to stay where you are when you retire or move somewhere else, it’s critical that you understand and include the cost of federal and state taxes, when estimating your retirement budget.

Reference: Kiplinger (March 4, 2020) “States Lower Taxes to Court Retirees”

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