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Transitioning into retirement is one of the most pivotal times in your life.
You’re not just leaving a career- you’re moving into an entirely new phase of your life. It’s an exciting time, and if you’ve planned properly (here are some handy checklists to help you make sure you’ve thought of everything!), then it should be a positive experience and one that you look forward to.
However, don’t be too quick to rush out the door. There are some things that you will want to discuss with your employer before you leave for the last time. These conversations with your employer will ensure that you have the right information you need to make decisions that will have long-lasting effects on your retirement.
What Company Benefits Extend to Retirees?
The first conversation you may want to have with your employer is to inquire about your benefits after you leave the company. This may come as a surprise, but your benefits won’t necessarily end just because you leave a job. Many companies offer benefits to employees who retire. You won’t know what these benefits are unless you check, so do your research and don’t assume that everything stops when you leave.
While you’re doing your research, you’ll want to make sure you review key health insurance documents. This includes:
Life insurance
Long-term care
Disability
If there is a risk-management benefit provided by your employer, it’s worth taking the time to read the policy or benefit description provided by your employer to see if it will continue with you - either automatically or by an option to continue the coverage on your own.
If you're retiring before you’re eligible for Medicare, retaining your health plan through your employer could be of great benefit. Sure, you’ll likely have to pay more than you were paying before but look at the total costs (what you'd have to pay vs. what the company would still pay) and make your comparison against what you’d otherwise pay for a new policy. Because many employers offer healthcare benefits at a lower cost than the open market, this may be a good route to choose.
Keep in mind there is more to this benefit than potential financial savings, too. Sticking with your employer’s plan can be a matter of significant convenience and preference - especially if you’ve been with the same employer (and therefore covered under the same policy) for a long time.
Keeping the same plan will most likely be easier to maintain the same doctors, care, and coverage you're used to. Changing plans means you may have to switch providers, migrate your records, and learn new processes, which can be a hassle.
Remember though, to thoroughly review your options. Don’t assume that because a continued benefit is available to you that it’s the best choice. It's still important to compare your options and weigh the pros and cons before you decide what to do.
For example, recall that the Affordable Care Act provided a refundable premium tax credit for certain individuals based on income. It was set to expire in 2023, but the Inflation Reduction Act extended those credits through 2025. You can only receive the credit if you purchase a plan through the Marketplace, so if you qualify for an extended premium tax credit, it might be cheaper than continuing under your employer’s plan.
And don’t assume that Cobra will be a less expensive option. COBRA provides eligible individuals with the option to continue the same health insurance plan they had under their former employer, but they will have to pay the full premium cost themselves, including the portion that was previously paid by their employer. The coverage period for COBRA is typically 18 months, but it can be extended under certain circumstances.
COBRA healthcare can be an important option for people who would otherwise be uninsured, but it can be expensive due to the full cost of the premium being the responsibility of the individual.
Have your financial advisor help you compare and decide which is right for you.
The bottom line regarding continued employee benefits after you retire is to make sure you know all the benefits available. Have a conversation with your HR department to discuss your retirement timeline and get the info you need ahead of time.
Will I Still Have Access to My Stock Options?
Stock options provide a way for employees to benefit when the share price of their company rises over time. Many senior executives earn stock options as part of their compensation package because it is believed to incentivize them to improve the business value and align their interests with that of the shareholders - the owners of the company.
Typically, stock options have a significant time component built in to disincentivize short-term thinking and encourage key executives to focus on longer-term value creation. This time component means stock options have a vesting schedule. You may be granted some form of equity compensation but may not be able to exercise it for several years. For example, you may be granted equity compensation, but it doesn’t vest (become yours or exercisable) for 3 years. Or a percentage (for example, 20%), may vest each year.
So, what happens if you are granted stock options (or other equity compensation) shortly before you retire, but they haven’t vested yet? If you have equity, it's important to know what will happen to them when you retire because it could represent a significant amount of money. What happens depends on the company. You’ll want to find out the following:
Will you forfeit anything that hasn’t vested?
Is there a transition period?
Do you get to keep a percentage?
Your answers will help you work the correct information into your plan, and time your departure accordingly.
Of course, it also helps if you understand the equity you have. Some of the most common types that you may have include:
Incentive Stock Options (ISOs): Allow you to purchase a share of stock at a predetermined price called a strike price. Again, the idea is that the strike price will be below the future market price when the options vest and you can exercise them. If certain rules are followed, you won’t pay income tax on the gain.
Nonqualified Stock Options (NSOs): These work much the same way as ISOs, but without favorable tax treatment. You will owe income tax on the gain between the strike price and the fair market price at which you exercise your options.
Restricted Stock Units (RSUs): A restricted stock unit is essentially a share of stock that becomes yours on the vesting date. You can then hold it or sell it just like any other stock. You will owe income tax on the fair market value of the shares when you receive them.
Understanding what you have, how it works, and the rules concerning any further vesting or exercising once you retire is critical so that you and your advisor, and your CPA can make a plan.
Favorable Taxation of Company Stock
There are also special tax rules concerning your employer's stock in retirement plans too. If you have significant company equity in your 401k or ESOP, you could look into a unique tax strategy called net unrealized appreciation, or NUA. This is another area you want to be careful about because you must follow specific steps to take advantage of it.
Net unrealized appreciation allows you to pay capital gains tax, instead of income tax, on the gain portion of company stock you withdraw from your retirement plan. If you’ve held shares for a long period that have climbed significantly in value, then this could result in large tax savings.
The logistics are very important for the proper execution of this strategy. You must withdraw the actual shares; you can’t sell them and then distribute the cash. This is called an in-kind distribution. You must also close the retirement account by withdrawing or transferring the rest of the assets. Again, it’s better to speak with a trained professional before taking action with this or other strategies.
How Do I Make My Pension Distribution Election?
Although they aren’t as popular as they once were, there are still plenty of people nearing retirement with pensions. You may be one of them. If so, there are a couple of things to consider here as well.
Before you are removed from the company payroll, make sure you know how to get in contact with the pension custodian. This is the entity responsible for managing the pension and ensuring it operates as it should. Once you leave the company and start receiving your benefits you may need to contact them, and find out how to will likely be easier while you still have a connection to your company’s HR department.
Why might you need to contact the pension custodian? Once your payments begin you may need to make changes, such as where to send payments or updating a beneficiary. Having that information readily available ahead of time will make it much easier and less stressful.
The big question will be how you want to take your distribution. You will usually have two basic options: a lump sum or regular payments. If you choose a:
Lump sum - you can roll your lump sum into an IRA, make investments, and take distributions in any amount on a schedule that works for you, subject to taxation and RMD rules.
Regular payment option - the payment will be guaranteed for your lifetime. There will also be several choices within this option concerning payments to a beneficiary if you pass away. You might have several choices such as 100%, 75%, 50%, 25%, or 0%. The ability to leave all or a portion of your payments to a spouse when you die should be carefully considered. The tradeoff among these choices is that the higher percentage you leave to a beneficiary, the lower your payment.
Review your options with your advisor so you can make a plan ahead of time. Like other areas of your retirement plan, this decision shouldn’t be made in a vacuum. Think about all of your sources of retirement income, such as Social Security or an annuity, and whether you have sufficient liquid assets that you could access in an emergency.
The best choice for your pension payout will depend on these other factors and what your preferences are.
Would The Company Be Open to a Part-Time, Contract, or Consulting Work Arrangement?
The classic view of retirement is that you leave work for a calm life of hobbies and traveling. This may not always be the case, though. The fact is most people don’t simply enjoy a pure leisure retirement for very long. While you may think you won’t necessarily miss working, many aspects of working play a huge part in our lives. Meaningful work can help bring fulfillment, routine, purpose, and community to your life as a retiree.
In fact, for some, retirement may just mean no longer working full-time. If that applies to you, you may not even need to “leave” at all. Many large companies have flexible part-time work arrangements that allow “retirees' to provide support on a contract or project basis, or as a consultant. This is good for both you and the company. After all, you have years of experience and insight that would otherwise leave with you.
If this is something you're interested in, bring up the conversation with your employer and see if they can create a transition plan that works for both of you. Again, this is something you want to address ahead of time. It's far easier to set something up while you're still on the payroll rather than 6 months to a year later. By then you’ll no longer be in the company’s system and they will have moved on to other options.
However, some caution is in order here. Only bring this up when you know you are ready- don't rush your timeline. Announcing your plans to retire too soon may mean you get passed over for promotions, or your role gets phased out sooner.
Retire With Confidence
This list of conversations to have with an employer isn’t exhaustive, but it’s a great place to start as you begin your transition into your retired (or scaled-back) life.
When you are confident that you are ready, give your retirement letter of resignation to HR and relax knowing that you’ve made the best decisions for yourself and your family - you’ve earned it!
Remember, the decisions you make now could permanently impact your retirement. Review your employer's retirement policy to make sure you’ve considered everything and don’t leave anything to chance. We’re here to help you navigate what you need to know for these conversations and to help make sure your road to retirement is a smooth one.
Contact us today to get started. We work with clients across the United States.
Author: Mark Fonville, CFP®
Mark is a fiduciary, fee-only financial advisor at Covenant Wealth Advisors specializing in helping individuals aged 50 plus plan, invest, and enjoy retirement without the stress of money.
Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine.
Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.
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