President Donald Trump is offering over two million federal government workers an early buyout if they choose to resign by next week. While that is prompting fear and panic within the ranks of government workers, for those close to retirement, it’s a double-edged sword. On the one hand, they can get on with their retirement life sooner, on the other hand, they may not be ready to exit the workforce.
Deciding whether you should accept an early buyout from the government or in your private sector job when you are nearing retirement comes down to several factors from your health to your savings.
“It’s important to do a serious assessment of your financial situation,”says David Blanchett, managing director, portfolio manager and head of retirement research for PGIM DC Solutions, the retirement advisory firm. “First, if you take the offer, it might be tough to get another job. Second, what would a 20%+ drop in your portfolio mean for your retirement outlook? I think understanding the potential impact is important.”
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White House offers more than 2 million workers buyouts
In the Trump administration's latest move to reduce government spending, the U.S. Office of Personnel Management offered all federal workers, excluding postal workers, military, immigration and other essential workers, buyouts under what it is calling a “deferred resignation program.”
Workers have until February 6 to decide if they want to voluntarily resign from their role. In return they will retain all pay and benefits and will be exempted from all applicable in-person work requirements until September 30, 2025. On paper that means workers will receive their pay and benefits for eight months after leaving.
Those who do not accept the buyout could still be on the chopping block later on, as the federal government said it anticipates layoffs.
“At this time, we cannot give you full assurance regarding the certainty of your position or agency but should your position be eliminated you will be treated with dignity and will be afforded the protections in place for such positions,” wrote the U.S. Office of Personnel Management.
Government workers who elect to stay on have to return to the office full time, meet new performance standards, be open to accepting furloughs and the reclassification to at-will status and adhere to “enhanced standards of suitability and conduct.”
The Office of Personnel Management said the move was part of Trump’s efforts to reimagine the federal government and said the changes to the federal workforce “will be significant.”
Should you accept a buyout if retirement is near?
Before accepting a buyout, people nearing retirement have to consider several factors. After all, getting paid for not working for eight months seems appealing but what about when the compensation period is over? Will you be able to survive exiting the workforce early?
Retirement can last more than twenty years, which means you need a lot of money to maintain your current lifestyle. If you have been saving for retirement for years, have a lot of money in the bank and invested and can afford to stop working, then accepting a buyout may be a no-brainer, at least from a financial perspective.
If you do not have enough money saved for retirement, taking a buyout before you are ready to retire could hurt your savings prospects and quality of life. By accepting the buyout you are forgoing the ability to make catch-up contributions to your company sponsored retirement plan, or otherwise save for when you do exit the workforce. Plus if you claim Social Security before your full retirement age (FRA), you will face a reduction in your monthly benefit.
If you think you will accept the buyout, enjoy the few months of pay and then reenter the workforce, be careful. It may be hard to find a comparable job. That’s particularly true if you are competing with millions of other laid off workers.
The ability to get another job should be factored into your decision, “if you view this as a reset into something else, especially if you’re counting on benefits after the benefit period ends,” says Blanchett.
Can your retirement account handle it?
Beyond your cash flow, Blanchett says to consider what a hit to your retirement portfolio will mean to your quality of life when you are no longer receiving a paycheck. The stock market has been on a long bull run, but what goes up eventually comes down, and if that negatively impacts your nest egg, will you be able to survive?
“Stock market valuations are pretty rich right now and while there's no indication any kind of crash is imminent, I think understanding the potential impact is important,” says Blanchett.
Don’t forget to consider your health insurance. If you retire early you have to wait for Medicare to kick in at 65. That could mean a few years of paying for your own health insurance, which can get pricey. If you have preexisting conditions, weighing the cost of health insurance and coverage should be top of mind when making your decision.
Don’t forget your quality of life
Finances are a big factor in whether to take a buyout, but how you’ll spend your newfound free time also has to be considered. After all, if you don’t have a plan, purpose or reason to get out of bed each morning, you could fall into a depression.
Many people who plan for retirement consider what their second act will be. For some it's travel or spending time with family. For others, it's to pursue a new career or spend their free time volunteering.
“It's really a personal decision,” says Sharon Carson, a retirement strategist at J.P. Morgan Asset Management. “For some people who take the buyout, it is the best thing ever. They can reinvent themselves. For other people it hasn't worked. You really need to look at your personal circumstances.”
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