What should we do?

[Aquafit2]

Hello! It's been a while since I have posted.. Long story short...

My husband retired in March of 2018. He was given a 24 month severance with full benefits. 14 months into his retirement, the company he left, fired the person who they had hired to replace him. They called and asked him to come back in the interim until they could find a replacement. They agreed to pause his severance and put him back on the payroll. They found a replacement 15 months later. By then he had become involved with some new long term projects that they didn't want to lose him on, so they offered him a part time job working on special projects. Fast forward.. now it's been 4 years since his "retirement." He is really enjoying this part-time gig and thinks he would like to do it for 3 more years. Now the question... Should he have them pay out the remainder of his severance now so we can deploy it into other investments OR wait for 3 more years and just collect it monthly, over the next 10 months, after he really retires? Keeping in mind that if we have them pay it all out now, we would lose that last 10 months of benefits (insurance etc.) I just feel like that money is just sitting there losing value. Thanks in advance!

 

[OldShooter]

The key is probably health insurance. Would either of you need health insurance during that 10 months or will you both be on Medicare? Also, how about employer 401k match money? Would he be leaving employer match money on the table if he took the early money? Those two numbers probably dominate the calculation.

A third number would be your marginal income tax rate on the money now vs on the money received after the PT paycheck is gone and your income is lower. It could be more tax-costly to take the money now.

One might argue that taking the money now and putting into equities in this down market might be a genius move for the next three years. Or it might not be. This stuff would be easier if our crystal balls worked better.

That's all I can think of.

 

[Aquafit2]

Old Shooter, Thanks for your response. My DH will qualify for Medicare, but I will not, his employer will not do the 403B match during that 10 months and our tax bracket will be the same then as it is now. So really it's just the health insurance for me. Thanks!

 

[Lawrencewendall]

This

 

[MichaelB]

A third number would be your marginal income tax rate on the money now vs on the money received after the PT paycheck is gone and your income is lower. It could be more tax-costly to take the money now.

This was my first thought. Even if the marginal tax rates are the same, if you delay taking the severance you also may have one additional year to contribute to a tax deferred account, offsetting the tax bites somewhat.

Health insurance for 10 months when you’re in your 60’s can be very pricy, especially if you don’t qualify for premium assistance.

 

[OldShooter]

Old Shooter, Thanks for your response. My DH will qualify for Medicare, but I will not, his employer will not do the 403B match during that 10 months and our tax bracket will be the same then as it is now. So really it's just the health insurance for me. Thanks!

Well, total the dollars you would save by not having to buy that health insurance and compare that to the after-tax dollars you'd expect to net by investing the after-tax early-payout money for three years. If it's even close, you'd be better IMO taking the risk free path of waiting for the payout and getting your ten months of tax-free health insurance coverage.

 

[Aquafit2]

I guess I should have added that the amount of the lump sum payout would be about $450K after taxes. Even if I put that in a 4% CD (which I was offered by my credit union just today) I have to believe it would make more money than the cost of insuring me.