When financial bait is dangled, many snap up early retirement

If you offer people something, don't be surprised if they take it. That's the lesson the John Hancock Mutual Life Insurance Company of Boston is learning after it saw how many employees took the company up on an early-retirement and severance program it offered last fall.

Hancock expected about 500 people to accept the offer, which included adding four years to an employee's ``age'' and to his or her years of service to become eligible for a full pension that much sooner. Instead, some 696 employees, or 53 percent of those eligible, accepted the plan by its March 31 cutoff date.

While the company acknowledges it lost more valuable senior employees than it planned, it hopes the departures will make room for younger, more aggressive workers who could be the managers and executives of the future.

The company is also happy about the savings: the incentive program's $26.2 million cost should be recovered in less than two years.

Hancock is just one of a growing number of employers who are trying to pare down through early-retirement programs, often called buyouts. In the past year, International Business Machines, American Telephone & Telegraph, DuPont, and Polaroid have also opened buyout ``windows'' - so named because they are only available for a limited time, usually three to six months.

DuPont had an even more ``successful'' buyout program last year, says John Dirlam, vice-president of Towers, Perrin, Forster & Crosby, an employee benefits consulting firm. ``They offered one and 10,000 people left. That was twice as many as they expected.''

More firms will probably be joining them as companies try to cut a leaner profile or shift some of their operations overseas. In the more distant future, buyouts may come more often as today's ``baby bomers,'' now starting to reach their 40s, begin to crowd upper management ranks.

``We're seeing a lot of it as companies downsize,'' Mr. Dirlam says. This is a good way for companies to encourage older employees to leave ``without violating discrimination laws, to be frank about it.''

``My wife's brother left DuPont last year at age 57,'' says Dale Detlefs, a manager with William M. Mercer-Meidinger-Hansen Inc., benefits consultants. ``He'd been there 30 years, but he was treated as a 62-year-old with 35 years experience.''

That's a fairly typical offer. DuPont's plan is known as a ``five-and-five'' because it treats employees as if they're five years older and have five extra years of employment. Companies can also use four-and-four or three-and-three plans. Generally, if more years of credit are offered, more employees leave.

Many buyout plans not only start paying full pension benefits a few years early, they also provide a ``bridge'' until social security payments start at age 62. And they might continue some fringe benefits, including payment of full life, health, and possibly disability insurance premiums for a year or so after retirement and to a lesser extent for a few years after that.

There are some important things to consider before stepping up to the early-retirement window.

The first and most important factor, Dirlam says, is for workers ``to be sure they really want to retire.'' Even if they are 55, or 60, or 63 some people simply want to keep working and they like their jobs. They would be unhappy not working and they should stay.

If they do want to leave but want to keep working, Dirlam points out, ``there's nothing to prevent people from continuing to work after taking these offers.'' In fact, if a person retires from the old job at age 55 and works at the new one for 10 years, he or she would be fully vested in both companies' pension plans, assuming the second firm had a qualified plan.

Taking on a new job after retiring early from the old one might also be needed to overcome the effects of inflation. While ``many large companies do provide ad hoc pension increases in times of high inflation,'' Dirlam notes, someone retiring at age 55 will have up to 10 additional years of living on an essentially fixed income. So extra resources put aside now might come in handy later.

Then why not just stay in the old job that much longer? Because you might not get this good an offer again, even at a ``normal'' retirement age. Sometimes, Dirlam says, these buyouts are actually more generous than normal pensions and, with few exceptions, they're one-time offers. That is, most companies don't plan to do it again, or certainly not in time to help those who are over 55 today.

That's not to say you should automatically accept a buyout and retire early. Even though you may have only a few months to make what could be a momentous decision, talk with an attorney, accountant, or financial planner to see how the pension income will match up with your expected outgo from here on.

An accountant or planner might talk about what to do with the money in an employer-sponsored savings plan, such as a 401(k). If you can live without the cash for a while, it's probably best to leave it alone.

``It all depends on each person's financial situation,'' Mr. Detlefs says. ``But if you can tolerate the lack of cash flow, it's better to roll it over into an IRA [individual retirement account].''

Under some recently liberalized rules, withdrawals from an IRA don't have to begin until April 1 of the year after you reach age 70. This gives the IRA just a little longer before it must be touched. Also, it's now easier to adjust the payouts each year based on life expectancy, which can keep the IRA from ever being exhausted.

If you have a question that would make a good subject for this column, please send it to Moneywise, The Christian Science Monitor, One Norway St., Boston, MA 02115.