Pros & Cons of Mandatory Retirement

Pros & Cons of Mandatory Retirement
••• dragana991/iStock/GettyImages

With the passage of the Age Discrimination in Employment Act (ADEA), mandatory retirement policies became illegal for most companies, with a few exceptions for organizations like government law enforcement agencies, police and fire departments, and businesses like airlines. Some companies are allowed to set a forced retirement age for top executives, as well.

While you might not ever have to deal with a mandatory retirement situation, you might be offered early retirement. There are enough similarities between the two that looking at the pros and cons of retiring early will help you decide if this strategy is right for you.

Mandatory Retirement Guidelines

If you’ve been told you must take a mandatory retirement, contact an attorney who is familiar with the ADEA. At some point, people who have very physical jobs won’t be able to do them as well (or do them at all) as they get older. Your attorney will tell you if you fall into one of these categories, one of which is “bona fide occupational qualification,” explains Bennet Epstein, an attorney for employment law firm Foley & Lardner.

Another category is “bona fide executive or high policymaking position,” which pertains to high-ranking company executives, such as a president or CEO. In this case, the executive must be offered some type of severance package that meets ADEA guidelines.

Early Retirement Offers

Older workers often cost more than younger workers due to increased salaries and wages (as part of a union contract), health care costs and retirement contributions. For this reason, businesses offer early retirement to older workers so they can replace them with less-expensive workers who get new, less-generous contracts.

Generally, early retirement offers provide a lump-sum payment that allows the company to modify or eliminate some or all health care and pension obligations.

Pros of Mandatory/Early Retirement

Just because you must retire from one company doesn’t mean you can’t go right back to work, or take a break before taking a new job, working part-time or starting your own small business.

In addition, you can use your lump sum to pursue a different investment strategy – for example, instead of your company’s pension or 401(k) plan – which might earn you more money. Early retirement also allows you to re-train for a new field, which will allow you more income-earning opportunities – something an older post-retirement worker might not want to do.

The benefits of mandatory/early retirement for businesses and government agencies can include increased productivity and efficiency and reduce costs.

Cons of Mandatory/Early Retirement

If you have the option to take early retirement, do the math before you accept the offer. Work with a Certified Financial Planner to see how much you’ll need for retirement, how much tax you’ll pay on your lump-sum payment, how much you can put into your 401(k) or IRA this year, and if you’ll be able to live on this income.

If your buyout won’t let you stop working, early retirement might be a problem if you won’t easily be able to find a new job in your field at your age. Research the job market to see what your options are, the likelihood you can find work after taking a break to re-charge your batteries, and what your pay and benefits might be.

The problems associated with mandatory retirement for businesses and government agencies is that it forces them to release potentially top-performing employees. It can also make it more difficult to attract qualified older workers if they know they will be discharged at a date earlier than they want to retire.