Microsoft is Offering Some Employees Early Retirement. Should You Take It?
For the first time in its 51-year history, Microsoft just announced that it will be offering voluntary retirement to thousands of its employees in the U.S. An estimated 7% of its U.S. workforce will be eligible for the buyouts, which includes personnel whose years of service plus their age totals 70 or more.
While the move by Microsoft may feel uncharacteristic for a firm that has a history of celebrating its long-tenured workforce, it also reflects a practical response to the current market dynamics. Big tech companies like Microsoft have been looking for ways to trim their expenses as they pour hundreds of billions of dollars into building out their AI infrastructure for the future and reallocate resources toward the next phase of growth.
To subscribe to the MalcolmOnMoney newsletter and receive more content like this, click here.
For those who were not already planning on retiring or actively searching for a new job, receiving such an offer can create some serious anxiety. You will have to weigh several factors before deciding whether accepting an early retirement package is the right move for your personal financial situation.
And if you are married, it is also important to consider how your decision will affect your spouse and any benefits they are entitled to if widowed. These are complex decisions with lasting consequences and should not be chosen hastily.
The first step is to read the details of the offer thoroughly and be sure that you understand what is on the table. Do not feel pressured to decide immediately; there is often a reasonable window of time to act. Under federal law, employees older than 40 who are offered an early retirement package have up to 45 days to consider and respond, plus 7 days after signing to change their mind and rescind the contract.
While an offer to retire early may initially feel like a burden, it could potentially free you up to pursue something you have always wanted to do but could never seem to find the time. Rather than shy away from the decision, lean in, put pen to paper, and decide whether you are in a strong enough financial position to do so.
Among other things, an early retirement offer presents you with the decision of whether to roll your 401(k) account into an IRA, what to do with any company stock you have accumulated, and whether to buy out your employer-paid life insurance. You will also need to identify healthcare insurance options and determine when to apply for Social Security benefits.
Making a decision like this also requires some advanced planning regarding taxes. You will need to calculate your anticipated income tax payments for the year you retire, since severance pay is typically provided as a lump sum and might push you into a higher tax bracket. There may be options available to defer some of that income and reduce the tax bite, so it is important to consult your tax professional prior to making a final decision.
While many workers fear that retiring too early could eventually cause them to run short of money in their later years, in some instances, individuals are in a better financial position than they give themselves credit for. Considering that, it is critically important to write out a list of your fixed and variable expenses, go line-by-line, and assess whether you expect each expense to continue into retirement or drop off once you are no longer actively employed.
Take inventory and figure out how much of your monthly income in retirement will come from fixed, predictable sources such as pensions and social security. The difference between those fixed income sources and your variable expenses will indicate the amount you will need to replace each month – either by portfolio distributions, part time work, or a combination of both.
According to numerous studies, Social Security is the largest source of income during retirement for many retirees. In which case, it is important to have a plan for when you will begin to collect social security retirement benefits. The Social Security Administration’s (SSA) full retirement age is now 67, and with advances in medicine and technology, Americans are living longer than generations prior. Today, according to the SSA’s website, the average life expectancy for a 65-year-old married man and woman is 83 and 86 years, respectively.
When reviewing your statement of estimated benefits, keep in mind that the SSA’s forecast assumes that you will continue to earn your current salary until you reach full retirement age. However, it does not calculate or assume that you would stop working and contributing to the Federal trust fund a few years early. In this scenario, there is a chance you will be better off delaying that application for benefits and living off your savings for a few years in order to maximize those Social Security checks once they start.
The primary concern of any retiree is outliving their assets. And withdrawing substantial amounts from your savings early in retirement can dramatically increase your odds of running out of money. Historically, a 4% annual withdrawal rate has consistently been shown to allow savings to last for a 30-year retirement. However, as an early retiree, retirement could last 40 years or more, which means that your annual withdrawal rate will need to be adjusted down to something closer to 3.5%.
Do not forget to budget for increasing healthcare costs. Anyone younger than 65 will need to determine how they will pay for healthcare, as they are not yet eligible for Medicare. Under a federal law known as Cobra, companies with 20 or more employees generally must allow departing workers to stay enrolled in the healthcare plan for up to 18 months. However, the full cost of the health insurance becomes the burden of the former employee, which could ultimately make it cost prohibitive to continue those benefits.
The longer you manage to avoid having to shoulder the full brunt of healthcare costs yourself, the longer your retirement savings will last. Working – even part-time – can reduce the drain on your savings and may even give you access to valuable health insurance benefits in the process.
Above all else, it is important to think about how you would occupy your time if retirement started tomorrow. Would you travel? Play golf? Volunteer? Be a consultant? If the answer – or the lack thereof – intimidates you for reasons that are not financial, it may be reasonable to assume that you are not ready to accept that early retirement offer after all.
Are you a Microsoft employee who would like to receive a second opinion on your financial plan or stress test your retirement readiness? Click here to schedule a complimentary consultation.
*************************
Malcolm Ethridge is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. His areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
To subscribe to the MalcolmOnMoney newsletter and receive more content like this, click here.
Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your tax and legal advisors before taking any action that could have tax and legal consequences.
Investments in securities and insurance products are:
NOT FDIC-INSURED | NOT BANK-GUARANTEED | MAY LOSE VALUE