Voluntary Retirement & a Pension Lump Sum

Guaranteed Income

If you're being offered an early retirement package, chances are you aren't yet eligible for Social Security, but you may have other guaranteed sources of income available. If you hold an annuity, you may be able to start drawing on that money when you stop working. If you're eligible for a pension from a previous job, you may be able to access that money early as well. The first step when offered an early retirement package is to look at all your sources of income and compare that guaranteed income to your expected monthly expenses.

If you haven't already done so, work on creating a post-retirement budget. Look at your current expenses and use them as a baseline, with the understanding that certain expenses will go down and others may go up. Find out from your employer if health care benefits are included in the early retirement package. If not, your budget needs to incorporate the current and anticipated future cost of health care coverage. Contact various health insurance brokers and start shopping around for an individual plan well in advance of your early retirement date.

If your early retirement package comes with a lump-sum pension benefit, it's up to you to manage that money and make it last, while also generating the income you need to meet your living expenses. Financial experts recommend that you withdraw no more than 4 percent to 5 percent of the money in that lump sum the first year in retirement, then adjust the withdrawals each year to cover inflation. The younger you are, the lower your initial withdrawal rate should be, as the money has to last that much longer. At a 4 percent withdrawal rate, that means you could take no more than $20,000 in income on a $500,000 lump-sum pension benefit.

Any time you're considering an early retirement buyout and lump-sum pension buyout, you should think about the next stage in your life. You might think you're ready to stop working for good, but eventually you may want, or need, to go back to work. Doing a thorough skills assessment and updating your resume are smart moves. Build a network of people you can go to if you do need to look for work, and try to keep your skills as up to date as possible. The more in demand your skills are, the greater flexibility you have when taking your lump-sum pension and moving on.