Companies offer employees incentives to retire early for a variety of financial reasons that offer both short- and long-term stability and profitability for the business. In some cases, early retirement packages help struggling companies reduce costs in the short term. In other instances, employment buyouts help the long-term profit outlook and make the company more attractive to investors.
Annual Pay Increases Catch Up
Some businesses pay workers who have been with the company longer than other employees more money, even though the productivity of all the workers is the same. This is because companies often offer workers annual raises. So, an employee who has been with the company for 30 years and makes 100 widgets per hour might make $28 per hour, while an employee who has been with the company for three years and makes 100 widgets per hour might make only $14 per hour.
In some cases, these annual wage increases are required by union contracts, and so the older, more expensive workers can't be fired, even though they cost more for the same work, or the company's employees will strike. Offering a voluntary early retirement buyout solves this problem.
Reduce Retirement Costs
Employer retirement contributions to pensions, health insurance and other benefits can begin to overwhelm a business if it's been around for decades. To reduce future costs connected to retired employees, a business might offer to give employees who are not yet at retirement age a large lump sum of cash now in exchange for giving up all or part of their retirement benefits (to the extent that this is legal).
The employees can take the lump sum, invest it and continue working for a different company. The employee might receive other benefits she wouldn't receive if she worked until retirement. Employers must be careful that any retirement incentives they offer don't violate the Employee Retirement Income Security Act rules regarding employee pensions and retirement plans, points out the Society for Human Resource Management.
Improve Stock Value
To increase the value of its stock, a business might offer early retirement packages that might cost the company a large amount now, but soon begins reducing labor costs. In some cases, instead of offering employees a lump sum now, the company tapers the payments over a number of years, making the hit to the company less severe.
The business will show shareholders and potential investors the math and how this will improve the company's future earnings, making long-term stock investment more attractive.
Avoid Age Discrimination Lawsuits
Some companies want to eliminate older workers for a variety of reasons, which can include the fact that they are less productive, are not up to date on the latest technology, cost more in wages and salaries, have guaranteed retirement payments coming and use more health care each year, raising employer health insurance premiums.
Employers can't fire someone based on her age or they will be in violation of the Age Discrimination Employment Act, explains The Hartford. Offering early retirement buyouts gets older workers to voluntarily leave, reducing legal problems for the company.
Should You Accept Early Retirement?
On the one hand, working with a professional financial planner, you can easily tell if you will come out ahead financially if you take a particular early retirement plan. On the other hand, early retirement can provide a higher quality of life, the opportunity to earn money in a new job or the opportunity to semi-retire and create the work-life balance you want.
If you make a mistake in choosing an early retirement buyout, you can't go back and rectify the situation once you've signed the agreement and taken your money. You might develop expensive, unforeseen health issues. You might not be able to find good-paying work as quickly as you thought. If your partner passes earlier than you planned, you will lose his or her income.
Investment firm The Equitable provides a list of questions you should ask and research before you decide to take an early retirement buyout. You don't have to accept one of these offers quickly, but they might expire within 30 to 90 days.
Steve Milano has written more than 1,000 pieces of personal finance and frugal living articles for dozens of websites, including Motley Fool, Zacks, Bankrate, Quickbooks, SmartyCents, Knew Money, Don't Waste Your Money and Credit Card Ideas, as well as his own websites.