I recently spoke with a wonderful couple who are at this crossroads. They were planning to retire in two or three years, but their experience during the COVID-19 lockdown prompted them to take an early retirement offer from their employer.
We are slowly but surely working our way back from the depths of the lockdown crisis. Retail sales data for the month of May showed that overall consumption in the U.S. is only down 6.1% from May of last year — incredible economic progress, bouncing back from being down 20% in April. Every day we watch industries come back onto the scene; some are quicker than others. For example, hospitality is still a long way from normal. Live events are still nonexistent. And air travel? This industry has a long way to go to get back up to speed.
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What happened with airlines during the COVID-19 economy is fascinating and singular. The entire industry went down approximately 95%, according to TSA screening data. Pre-COVID-19 passenger levels clocked in at around 2.4 million people a day. That number of flyers dropped to under 100,000. It's astounding. Today, we're up to almost 500,000 passengers per day. So, we've quintupled our numbers in a little over a month.
Despite that increase, airlines are still facing a forbidding gap between revenue and costs. In response, Atlanta-based Delta is taking a step that will make some of its 90,000 employees consider retiring sooner than they planned. It’s been reported that up to one-third of Delta’s workforce could be or have been offered an early retirement buyout. That’s up to 30,000 buyout offers. Staggering.
According to an Atlanta Journal-Constitution article, the amount of severance varies and depends on years of service, up to six months' pay. Delta is also offering health care coverage for one year for those who take an "early out" package and two years for those who take early retirement, as well as flight benefits for both. I've also heard some different variations on the individual packages, and some folks saying the health care portion alone could be worth six figures. So, a pension, health care bridge and nearly a half a year's worth of pay. That's a real offer. If a Delta employee is on the fence about when to call it a career, you can see how such an offer might tip the scales toward retiring today as opposed to three or four years from now.
Given the continued uncertainty in the economy, Delta probably won’t be the last company to offer buyouts. Should you accept such a deal, assuming you are ready for retirement?
There are several factors to consider from a financial planning standpoint when making that decision. Here are just a few issues to address:
• Will you receive a lump-sum severance payment or a series of distributions? This can have major tax consequences. For example, let's say you earned $150,000 in 2020 before being offered a severance package that pays you $100,000. If you take that $100,000 in a lump sum, your 2020 tax rate could certainly jump. If you are able to spread these payments out over time, and into the next calendar year, it could help to keep your overall tax rate at a lower level versus taking the whole payment at once.
• Will your company's health care coverage continue? If not, you may be looking at some hefty private insurance premiums (and high deductibles) before you can enroll in Medicare at age 65.
• What are the survivor rules on your monthly pension payments? If you are fortunate enough to receive a monthly pension offer, here are a few things to consider. Will your spouse get 50% of your pension for life? Seventy-five percent? Nothing? This information is critical to your long-term financial planning.
As a wise person once said, a dream without a plan is just a wish. If your experience during the lockdown has you dreaming of a buyout-fueled early retirement, make a plan, do your homework — or work with a financial adviser — to make it happen.
Wes Moss has been the host of “Money Matters” on News 95.5 and AM 750 WSB in Atlanta for more than 10 years now, and he does a live show from 9-11 a.m. Sundays. He is the chief investment strategist for Atlanta-based Capital Investment Advisors. For more information, go to wesmoss.com.
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