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Some pros and cons of early retirement.

The Age Discrimination in Employment Act (ADEA) of 1967 as amended forbids discrimination against men and women over forty years of age. It also prohibits mandatory retirement for age. The Act does afford employers certain exceptions. One such exception permits employers to reduce workforces by offering truly voluntary retirement incentives. Although voluntary programs can be humane and beneficial to both employee and employer, they can also be costly and undesirable to both. Companywide early retirement programs rarely do companies long-term good. Offers frequently encourage the most creative, risk oriented and productive employees to leave, while those who have doubts about their ability to compete elsewhere remain (Machan, 1989). However, carefully designed early retirement programs can be beneficial. For example early retirement plans at IBM (Harris, 1986) and Nynex Corporation (Lopez, 1989) cut costs and improved competitive position in a sagging economy. This paper addresses the pros and cons of early retirement programs. Key considerations in framing early retirement programs are: (1) defining the appropriate early retirement plan and (2) deciding which employees will be eligible. An examination of theories of retirement in antecedent to both considerations.

There are a large number of theories about the effects of retirement on individuals. These theories propose that retirement has little effect on the quality of life, that it has a very large effect, and that its effect depends on moderating factors (Beehr, 1986). Theories have shaped thinking and research about retirement but none of them was developed as a theory of retirement specifically. Most are theories about the general process of aging. There is no comprehensive theory of retirement that can provide a frame work for organizing and interpreting research evidence.

Theories of Retirement

Most theories about retirement have emerged from the fields of gerontology, psychology and sociology. These theories have focused on various aspects of a retiree's life, such as quality of life, physical and mental health, satisfaction with life and retirement and mortality. While general theories of aging have dominated theories of retirement, these have not been very useful (Burnett, 1989).

The major differences in theories of retirement include the importance of work roles relative to other significant life roles and the degree to which substitution of other life roles can aid adaptation. Since there has been little attempt to integrate individual theories, there is no single comprehensive theory of adaptation to retirement. Therefore, attention has centered on personality variables. This in turn explains some of the individual variation in levels of leisure activity and life satisfaction.

Early Retirement - A Look Ahead

Recent trends project that early retirement will be negotiated on a selected group basis within time limits to prevent simultaneous mass employee defections and to preserve critical skills. Negotiated plans have presented some legal problems, and court rulings are somewhat inconsistent. Pending legislation may provide clearer guidelines (NIBM, 1990). In view of legal uncertainties, companies are planning retirements more carefully and are reserving the right to veto employee requests for early retirement. Early retirement programs should not be remedies for poor human resource management practices but should be part of a total personnel program (Machan, 1989).

Both employees and employers consider similar matters when planning early retirement. Economic conditions are important: if jobs are hard to find, fewer employees will opt for early retirement. The specific features of an early retirement plan will affect retiree demographics. Alternative employment opportunities are also considerations, since some early retirement plans provide supplemental pay for retirees who pursue certain types of careers (Solomon, 1989).

Lawsuits and court challenges also matter. Case law suggests that employers may exercise a veto over who will be given the option of early retirement, but veto power must not be used to discriminate. Another issue is the appearance of coercion. Limited selection time and negative incentives, such as cutting health and life-insurance benefits for employees who don't retire immediately, can result in employee lawsuits (Fox, 1988). Federal courts have held that early retirement plans are not inherently discriminatory but may be illegal if they amount to constructive discharge. Therefore, employees should: (1) be given full information about the plan, (2) have enough time to consider the offer, and (3) not be threatened in any way with involuntary termination unless grounds for involuntary termination exist (Godofsky, 1988). Coercion may also comprise the motivation of remaining employees who see how the company treats its long service employees.

Another trend is the increased use of rehearsal retirement and tapering off programs for early retirees. Professional out-placement and financial counseling for employees and spouses are being expanded into full scale job and leisure training programs. Probably the most significant trend is a growing recognition that early retirement may be a thing of the past. Declining job opportunities, increasing cost of Social Security and private retirement plans, later age of family formation, reduced propensity to save, and increasing costs of living argue against early retirement programs.

Early retirement programs run counter to two national phenomena: Congressional desire to promote later retirement, and demographic indications that the nation will have a smaller labor pool in the next two decades (Fluhr, 1989). Congressional desire to promote later retirement is manifest in its increase in Social Security earning limits and in legislation against mandatory retirement. A diminishing labor pool argues forcibly against the attrition of early retirement. This obvious conflict of policies is especially significant as the nation struggles to compete in world markets.

Why Employees Retire Early

Employees retire early for physiological, psychological, social and economic reasons. Physiological reasons include poor health and health maintenance. Employees may also wish to retire if job stress and work demands become detrimental to their health. Psychological reasons include the need to find a more desirable workplace interaction (declining work challenge and limited chance for advancement), need for new learning experiences and new successes, and need to fulfill childhood dreams. Social reasons include peer group pressures to retire (from both coworkers and friends outside of work) and the intensity of family ties (care for elderly relatives or to take over the family business). Economic reasons center on financial status and include the perceived adequacy of retirement income and spousal financial status and retirement intentions.

Many early retirees seek other employment. They look for job satisfaction and a sense of accomplishment not achieved in their pre-retirement job, a chance to remain active and to avoid boredom, an opportunity to fulfill childhood dreams, and a way to contribute to society. Early retirees may return to work in different ways: a job with another company, self employment, free lance consulting, or their own company.

Employees' Early Retirement Problems

Employees who opt for early retirement must often solve financial problems, since retirement frequently entails a loss of perks and income (Crossen, 1989). These problems can be managed in various ways. Employees able to invest enough during working years can sustain their current life style. An alternative is to alter their life style, foregoing luxuries and living on a smaller income.

A second problem is psychological. Retirees face role changes which raise questions of self image, values, power and security. They should be advised of the need to anticipate and realize the changes retirement will require in their lives. For example, retirees will need to establish a personal identity independent of their work role in the company. They must see the necessity to give up what they have spent their working lives building and to replace company values and peer expectations with their own values and expectations. They must learn to live with the loss of power that often accompanies leaving an organizatiion. They must also learn to build security into new surroundings and routines, replacing the loss of security of a sure and settled place in the familiar world of work.

An identity crisis is a third early retirement problem. This problem exists because we often equate who we are with what we do and how much we earn. Pre-retirement seminars, new hobbies and changes of environment can help develop a new identity.

Many retirees face boredom. The eagerly anticipated time to "do the things they always wanted to do" may turn into a dull routine of satiated leisure. Thus, retirees are encouraged to develop meaningful hobbies and to intersperse leisure activities with worthwhile projects.

The Issues of Early Retirement

Two categories of issues which emerge from research on successful retirement which deserve discussion: (1) personal factors, and (2) environment factors (Beehr, 1986).

Personal Factors. Four attributes have been found to influence the decision to retire: Type A behavior, skill obsolescence, health and economic well-being.

Type A behavior, characterized by hard driving, aggressive, impatient activity, is hypothesized to be an indicator of coronary-prone individuals. This type of behavior variously affects early retirement. It appears that Type A people are less likely to retire, because they relish the pace and competition of the work environment. However, if their health deteriorates, they may retire early.

When employees' job skills become obsolete, they may be more likely to retire for two reasons. First, they may be unhappy performing a job for which they are not prepared and which they probably perform poorly. If obsolete workers are older, they may opt for retirement. Second, organizations often offer enticing retirement options to workers who are viewed as obsolete, so that they will retire and make room for more skilled workers. These retirement options are also encouraged because senior people are often paid higher wages.

Employee health is considered to be a good predictor of retirement decisions. It may, however, be less valid as a predictor of normal retirement than of early retirement, if health declines with age. Most research finds no relationship between health and retirement when demographic variables are factored out. Much more carefully controlled study is needed before definite conclusions can be drawn.

Personal financial condition is an important factor in the retirement decision. It is probably not the decisive important factor, since a desire to quit working is also a function of the type of work an employee performs. Finances greatly influence a decision to retire earlier rather than later. Early retirees lose more years of higher-paid employment and receive lower annual retirement pay.

Environment Factors. Environmental factors that may influence the decision to retire are attainment of occupational goals, job characteristics, marital and family situations, and leisure pursuits.

The relationship between attainment of occupational goals and retirement seems logical, but its precise nature remains a mystery to be probed by further research. An employee may retire because he/she has accomplished all that is desired and has no further achievement-related reason to continue working. Conversely he/she may be so frustrated by failure to achieve desired goals that retirement may be a welcome out.

Undesirable job characteristics may provide the push to get out of the job. Other job characteristics which may be related to the decision to retire include: travel required, physical labor, outdoor work, the nature of physical working conditions and supervisory style. Some job characteristics may exacerbate other physical causes of retirement; for example, high tech jobs subject to rapid technological change might lead to skill obsolescence, and this in turn might encourage retirement.

Marital and family situations can also influence early retirement decisions. Although there is little research evidence, it is speculated that the prospect of spending more time in a family setting after retirement may be an inducement to retire. Family situations may also increase or decrease financial obligations. Children entering or graduating from college can have a significant impact on the family's economic well-being. The death of a spouse might influence retirement. A severely depressed employee may withdraw from social activities, including work. Conversely, the death of a spouse who suffered a long-term care intensive illness, might free an employee to renew work or leisure activities. The retirement decision may be postponed or exercised.

Nonwork activities may also influence an employee to retire, even though leisure activities may not increase after retirement. Retirement may result from an anticipation of more leisure time or from the pull of a change in work or life activities. Retirement may allow time to travel or to write the great American novel.

In summary, retirement is a process that occurs over a period of time and involves making decisions, implementing those decisions and experiencing their consequences. Individual characteristics and environmental variables influence the decision to retire, and both employee and employing organization are affected by retirement. To date research on retirement has focused on the welfare of the individual. Adding an organizational perspective should aid significantly in understanding the causes and consequences of retirement.

Who Should Retire Early

Different occupational, psychological and leisure time responses of early retirees suggest that early retirement is not for everyone. Numerous questionnaires (quizzes) are designed to help an employee determine whether early retirement would be boon or bane by ascertaining an individual's psychological (emotional) readiness for early retirement (Schwartz, 1989).

Planning for Early Retirement

Emotional readiness for early retirement involves financial readiness. Financial readiness requires careful planning. Here, too, questionnaires can help a prospective early retiree determine readiness (Jasen, 1989).

The key question facing early retirees is whether they will have sufficient income. Financial advisers suggest a minimum income of 70-80 percent of pre-retirement income for a period of 30-40 years. These data consider reduced expenses for commuting, clothes, and taxes, as well as increased costs of health care and recreation.

Financial planning can follow several approaches. Ideally an employee should start planning during early employment and build equity through regular saving and investment. Early plans should be based on a life expectancy of 95-100 years. If the employee is young or is not within ten years of retirement, investment in stocks if often recommended, since younger workers can accept more risk. If there are dependent children, tax exempt variable rate bonds can serve as an inflation hedge. Financial advisors believe in delaying the use of savings as long as possible. They also recommend setting up a portfolio promising varied rates of return and investing in securities tied to inflation rates (Treasury bills and U.S. savings bonds).

Late starters should take a different approach. They need large savings and low risk tax deferred investments to provide quick growth. They should consider blue chip stocks or mutual funds in a laddered portfolio (bonds with different maturity dates). Another possibility is a reverse mortgage, where a bank makes a monthly payment based on both the owner's equity in a house and the owner's life expectancy. The bank recoups its payments by selling the house after the owner's death, and any surplus goes to the heirs.

Recommendations for an Early Retirement Program

1. Start early. Plan for retirement from the first day on the job. Incorporate retirement plans into other plans. Assume a need for 80% of pre-retirement income to age 100.

2. Study possible options. Get financial and psychological assistance.

3. Analyze the situation carefully. Use available tests. Anticipate change and consult family members.

4. Use company programs. Try a gradual retirement experiment to test reaction.

5. Have a health check-up.

6. Analyze the job market if other employment is contemplated.

7. Study community retiree programs.

8. Keep abreast of laws concerning social security, taxes and retirement plans.


Employee early retirement programs are in confusion. Even the courts are divided concerning the legality of such programs. The impact of the confusion may be felt by both employee and employer. Appropriately planned and carefully implemented, early retirement can bring about a humane and beneficial workforce reduction. Cost cutting can be achieved without hostility or economic, social or psychological hardship, while at the same time the organization is left in a better competitive position. Inappropriately planned and implemented early retirement plans can result in loss of experienced and highly productive workers, deep employee resentment, lower morale, and possible lawsuits.

Both employer and employee must plan carefully. Employers must limit the early retirement option to specific employee groups. Any plan must be carefully communicated, voluntary, and provide for reasonable decision time. Employees must be sure they have resources to sustain themselves financially and psychologically during retirement. Generalization is difficult because each employee and each employer faces unique problems. However some guidelines are possible. One guideline which seems to apply to both employee and employer is to seek expert assistance.


Beehr, T. (1986), The Process of Retirement: A Review and Recommendation for Future Investigation, Personnel Psychology, 39, 31-55.

Burnett, J. (1989), Retirement versus Age: Assessing the Efficacy of Retirement as a Segmentation Variable, Journal of the Academy of Marketing Science, 17, 4, 333-343.

Crossen, C., (1989), Identity Crisis: A Loss of Status Afflicts Some Early Retirees, The Wall Street Journal, December 8, R. 5.

Fluhr, H. (1989), Early Retirement Programs Carry Benefits, Pitfalls for U.S. Companies, Pension World, February, pp. 34-37.

Fox, S. (1988), Age Discrimination and Early Retirement, Pension World, May, pp. 35-39.

Godofsky, D. (1988), Early Retirement Pensions: Penalty or Perk?, Personal Journal, August, pp. 69-73.

Harris, M. (1986), A Lifetime at IBM Gets a Little Shorter for Some, Business Week, September 29, 40.

Jasen, G. (1989), Save Before You Leap, The Wall Street Journal, December 8, R. 29-30.

Lopez, J. (1989), Nynex Unveils Early-Retirement Plan for Managers in Hopes of Cutting Costs, The Wall Street Journal, December 2, A3.

Machan, D. (1989), The Hidden Cost of Golden Handshakes, Forbes, February 20, 130.

Schwartz, G. (1989), Are You the Retiring Type? Take This Quiz and Find Out, The Wall Street Journal, December 8, R. 34.

Solomon, J. (1989), A Fine Line: Companies' Retirement Plans Weave a Path Between Compassion and Pragmatism, The Wall Street Journal, December 8, R. 17.

The National Institute of Business Management, Inc., (1990), Research Recommendations, January 15, p. 2.
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Title Annotation:early retirement plans
Author:Paul, Robert J.; Townsend, James B.
Publication:Review of Business
Date:Jun 22, 1992
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