If you are the victim of a company-wide layoff, you might be tempted to call it a career and go straight from the office or factory to your rocking chair. But before you use a layoff as an excuse to retire early, you need to think through both the short-term and the long-term implications of that decision.
Early Retirement Incentives
Some companies offer early retirement incentive packages to entice older workers to leave the company when layoffs are scheduled. These voluntary early retirements help to reduce the number of involuntary layoffs, and they save the company money on salary and benefit payments. If your firm is offering an early retirement incentive package, read the information carefully and make sure you understand exactly what is being offered. It might be helpful to have an attorney look over the documents and explain anything you find hard to understand. Some incentive packages provide a one-time lump sum payment, while others pay a set amount for the rest of your life. In addition to those payments, some early retirement packages include health care benefits, which can be very useful to early retirees.
If you retire following a layoff, you probably will not be able to collect unemployment benefits. Those benefits are designed for laid-off workers who are actively seeking new employment, not for those who are planning to retire. It might make sense to sign up for unemployment to keep your options open, collecting your benefits while you assess the employment picture in your area and sort through your retirement resources to determine whether or not you have enough money saved to stop working for good.
If you need to withdraw money from your 401k or IRA to meet your income needs in retirement, you need to make sure you are eligible to withdraw that money without a penalty. If you are under age 59 1/2 you could face a 10 percent tax penalty on the money you pull from your retirement plans, plus ordinary income taxes on the money you withdraw. You can, however, use the 72t provision to withdraw 401k and IRA money before age 59 1/2. Using the 72t provision lets you avoid the tax penalty, but the amount you can withdraw is determined by your age, your life expectancy and the balance in your account. If you are in your 40s or early 50s, you might be quite limited in your withdrawals, and you must maintain that withdraw schedule until you reach age 59 1/2.
In the end, the biggest factor impacting your decision to retire after a layoff might be your budget. If you do wish to retire following the current round of layoffs at your company, you need to crunch the numbers and develop a realistic retirement budget. Once you know how much you expect to spend, add up all of the guaranteed sources of income you have available, including pension payments, annuity payments and Social Security. Any shortfall will have to be made up from your retirement or personal savings. If you need to withdraw more than 4 to 5 percent of your total nest egg to meet your income needs, you might not have enough money to last you through 30 or more years of retirement living.
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