Key to accepting early retirement is knowing what questions to ask A PLAN FOR THE FUTURE


As companies look for ways to downsize and cut costs, some workers are finding themselves on the receiving end of early-retirement offers.

These plans may offer, singly or in combination, a lump-sum payment, additional or enhanced pension benefits, health insurance for a certain period and a "bridge" until Social Security kicks in. Normally, the offer is good only for a limited time, or "window."

Financial experts say employees should consider a number of points before making a decision, especially under deadline pressure.

"Early retirement is not for everyone, but there's the fear that if they don't take it, they'll be released anyway," says Shirley Waldrum, a senior program specialist with the American Association of Retired People.

"A lot of people either don't ask the right questions or don't know the questions to ask," she says, adding that many are enticed by the one-time severance offer. "That lump sum of money isn't that much when you spread it over a number of years. If they don't have good financial planning, they can be broke in a very short time."

"I know that when many people are offered early retirement they jump at it," agrees Patricia M. Tengel, a family resource management specialist at the University of Maryland Extension Service. Too often, she says, people don't know enough to make a sound decision.

While financial experts strongly recommend that people consult with their own accountants, lawyers and/or financial advisers about their specific circumstances, they do flag some points to consider in deciding whether to accept an early-retirement package:

* Know the provisions of your pension plan.

"A lot of people think once they retire that their benefits will start," says Waldrum. "That's not necessarily so."

Find out when you would begin getting benefits, and how much. You need to know if the benefits being offered for early retirement are the same or less than would be paid at normal retirement age.

For instance, as an incentive, companies that normally pay early retirees a lower monthly benefit will offer the full amount. Or some will give bonus years -- such as adding five years service to the 20 you actually worked for a total of 25 -- for the purpose of calculating your benefit. Some provide a "bridge payment" until the recipient is old enough to collect Social Security.

In addition, if you intend to get another job, find out if and how that can affect your pension benefits.

Make sure you know what your plan provides for your spouse if you should die.

Read the summary description of your pension plan, known as a Summary Plan Description (SEP), that a company is required to distribute to all plan members.

"Ask your personnel officer to thoroughly explain the implications of your plan," advises Tengel.

* Find out what your Social Security benefits will be.

Get a Personal Earnings and Benefit Estimate Statement from Social Security. You need to fill out a request form that can be obtained by visiting a Social Security district office near you (in the blue government listings of the Yellow Pages) or you can write to Consumer Information, Dept. 55, Pueblo, Colo. 81009 and ask for a Personal Earnings and Benefit Estimate Statement request form (Form SSA-7004). You can not call local offices; Social Security operates a nationwide toll-free number to handle all inquiries: 1 (800) 234-5772 from 7 a.m. to 7 p.m. (Getting through is not always easy; for non-emergency requests, officials suggest calling between 7 and 9 a.m. or 5 and 7 p.m. Also, days later in the week are better than at the beginning of the week, and days later in the month are better than the start of the month.)

It will take four to six weeks to receive the report, which lists all the wages reported for you since 1950. Make sure it's correct. The report also will estimate your benefits for retirement at 65, or earlier if you request it.

You can begin to draw Social Security at age 62 and one month, but monthly benefits will be permanently reduced by 5/9 of 1 percent for each month prior to age 65. At age 62, the reduction amounts to 20 percent.

If you're between 62 and 69 and plan to get another job, be aware that earnings above certain thresholds will cut your Social Security benefits. This year, those under 65 will see their benefits reduced $1 for every $2 earned above $7,080. For those 65 through 69, benefits will be cut by $1 for every $3 earned above $9,720. At 70 and above, there is no reduction.

* Estimate how much income you will need to maintain your standard of living.

"You've got to look at your own living expenses," says Alan B. Fabian, compensation practice leader in the Baltimore office of Arthur Andersen & Co., one of the Big Six accounting firms.

You need to figure costs in major categories such as housing; utilities; food; transportation; clothing; health care; insurance; taxes; recreation and travel; savings and investment, gifts and contributions; and personal costs, such as hair care, newspapers etc.

Fabian cites life insurance often provided by employers as one example.

Normally retirees don't need the same level of insurance coverage, but those taking early retirement may still face heavy obligations like big mortgages and college costs and can't afford to go unprotected.

"If you have term life with your employer, you'd be surprised to find out how much it costs," Fabian says.

Hard as it may be, you also need to look realistically at your life expectancy. If you're 55, in good health and have a family history of longevity, you can expect perhaps 20 or more years of life. If, on the other hand, you're 64, have health problems and come from a family where few have made it to 70.

* Take inflation into account.

Most pension plans, says the AARP, do not have an automatic cost-of-living adjustment (COLA). When they do, they usually are limited to 3 percent a year.

At an annual inflation rate of 3 percent -- and that would be lower than recent levels -- a fixed pension will lose one-third of its purchasing power in 11 years.

All too frequently senior citizens put their money in very safe investments that lose purchasing power over time, says Fabian. "Whatever you do, don't put it in passbook savings," he advises.

* Be sure you know what health benefits, if any, are included and how ironclad any guarantees are.

Often early-retirement plans offer health insurance coverage for a specified time but, especially for a younger retiree, it may not last until Medicare kicks in. Sometimes the offer is a statement of intention, but is not a definitive commitment.

Companies, especially smaller ones, may not be able to keep up with skyrocketing premiums, she warns.

"What we are seeing is companies that made the commitment years ago and since then costs have tripled," she says. The result: some companies have reneged.

In addition, consider the health needs of dependents. A husband of 62 may take early retirement and have health coverage provided until he's 65 and eligible for Medicare. But his non-working wife, who's eight years younger, then has no

coverage and is too young for Medicare.

"It's almost impossible to keep her coverage, especially if she has some medical problem, say a little diabetes, a little heart condition," Morrison says.

A key question, she adds, is do you have dependents with either physical or emotional problems that can result in high medical costs? If you do, coverage could be extremely expensive, assuming you can obtain it at all.

* Plan for taxes.

Should you retire and collect Social Security, up to half your Social Security benefits could be taxed if your income exceeds $25,000 (for a single person) or $32,000 (for a married couple filing jointly). Income, in this instance, includes your adjusted gross income, tax-exempt income and half your Social Security benefits.

Consider the tax implications of lump-sum payments. If you receive a lump-sum distribution from a 401(k) or other plan, it's "absolutely imperative" that the money be reinvested in a qualified retirement plan within 60 days, cautions Fabian, or you could face a penalty as stiff as 40 percent. Alternatively, there are some tax-averaging treatments available that could reduce the rate.

There's another danger of not rolling over the payment: Forty-six percent of those who get a lump-sum distribution end up paying the tax penalty and spending the money meant for a retirement nest egg, Fabian cautions.

Fabian believes it's generally better to take severance as a lump sum rather than as an annuity if a choice is offered, especially if there's a chance the company may go out of business. If you get a big severance payment, make sure you make tax payments equal to 100 percent of your last year's income tax; that will ensure you will not face a penalty for under-withholding, according to Steven S. Bloom, also at the Baltimore office of Arthur Andersen. You then pay all the tax due when you file your 1991 tax return; make sure you keep the necessary cash on reserve.

* Consider the alternatives.

What will happen if you don't take the offer? Are layoffs likely, and if so, does your seniority protect you? Is it likely that your company might go out of business? How likely is it that you will get another job?

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