Q&A: Early Retirement Offer

Sep 2020


Dear Rick:
As I am sure you know, Ford is offering an early retirement offer and I have chosen to accept it. I was planning to retire at the end of the year, so for me this is a bonus. I do, however, have some questions that I hope you can help me with. My first question deals with my 401(k) plan. My plan is to transfer the money into an IRA when I leave Ford. I don’t see any advantage in leaving it there; is there one? My next question deals with Social Security. I am 67 and therefore entitled to my full Social Security benefits. However, I don’t need the money at this time. Not only is my wife going to continue to work for a few years, but I will also have a distribution from an estate where I was the beneficiary. The money from the estate and my wife’s salary more than cover our needs. Therefore, does it make sense to delay Social Security? Finally, regarding the money I receive from my early retirement, I’ve been told that because it is like severance pay, you don’t have to pay taxes on it; is that true?


Dear Ted:
I agree that it makes sense to accept the offer and to transfer your 401(k) money into an IRA. My general belief is that you have much greater flexibility in an IRA with regards to how the money is invested, investment options and with regards to distributions. Therefore, in the great majority of cases, I do recommend that when people leave their job, they transfer their 401(k) money into an IRA. However, like everything else, there are exceptions to the rules.
I would not recommend someone transfer their 401(k) into anything that has high costs and high commissions, such as a variable annuity. Costs do matter, and in too many cases when people move their 401(k) money into an IRA, they pay unnecessary expenses. Therefore, before you move your money make sure you are using low cost commission-free investments.
With regards to Social Security, once again, I think you are right on. When you delay your Social Security from your current age to 70, you earn an eight percent return yearly on your money. In today’s low-interest rate environment, an eight percent guaranteed rate of return is exceptional. Therefore, since you do not need the money from Social Security, I think it is a great strategy to delay it until age 70. After age 70, there no longer is any financial incentive to delay receiving your benefits. The one exception to this is if there were health issues which would affect life expectancy. In those cases, it may pay to take Social Security sooner than later.
I would love to tell you that the money you are going to receive from your early retirement is not taxable, but I can’t. This money is taxed to you as ordinary income. It does not matter how the employer classifies the money, whether they call it a bonus, severance, or whatever, the money is coming from your employer, therefore, it is taxable.
Many people in our area are receiving offers from Ford, as well as other companies. In reviewing these offers, the key is to look at your own individual situation. What your friends and work colleagues are doing should not sway you one way or the other. The key is whether the offer is good for you. Everyone’s situation is different, and there is no one right answer for everyone. There is, however, a right answer for you and that’s what you should focus on, because that is what’s important.

Good luck!

Rick is a fee-only financial advisor.   If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.