On Thursday, September 7th, Eli Lilly announced plans for a Voluntary Early Retirement Program (VERP) for up to 2,800 current employees. General guidelines for the program and an anticipated timeline were sent to eligible employees. Additional information is being mailed to their homes outlining more details and personal estimates for the employees enhanced benefits under this program.
For some, this may be an exciting offer and the opportunity they were hoping for to step away from their careers and begin the next phase of their lives in retirement with some enhanced benefits through the VERP option. For others, this offer may present more questions and require significant thought before taking any action. If you or someone you know falls into the latter category, there are several items we think should be considered before applying for VERP.
- Retirement Cash Flow – According to the guidelines that were sent out Thursday, Lilly will be offering additional years of service credit, as well as additional years of age credit to those who take the VERP offer. This will benefit participants in two ways: Not only will these additional credits increase the monthly pension payment received but they will also increase the retiree medical benefits. The higher monthly pension benefits will increase participants cashflow through out retirement, helping them live potentially more comfortable lives knowing they have this benefit. The increase in the retiree medical benefits will likely lead to lower out of pocket costs for health insurance premiums which will be necessary if participants retire prior to Medicare eligibility at age 65.
- Tax Impact – Receiving a larger pension benefit and the one-time lump sum payout could have a significant impact to participants’ current and future income tax rates. We recommend meeting with your Certified Public Accountant (CPA) to discuss your personal situation. A few items to consider would include your marginal tax rates, both in the year you receive the lump sum and while receiving pension benefits, higher capital gains tax rate due to the increase in income, and potential phase out of tax deductions and/or credits. Also, be prepared for the tax bill that will be due in the year the lump sum is received. Receiving a significant amount of additional income in one year may require quarterly tax payments or paying a large tax bill in the Spring.
- Benefits of Continued Employment – While most people would likely say they would prefer early retirement, there can be a lot of benefits to continued employment. Employees who currently receive Equity Awards from Lilly may want to continue employment to be eligible for additional awards or to fully vest in awards currently outstanding. Please note: Lilly has not outlined how currently outstanding equity awards would be treated if you decide to take the VERP option. If one of your goals is to leave a financial legacy for your family then continued employment would likely help to make that possible. Beyond the financial impact, many people enjoy their current employment and would like to continue working for personal fulfillment. We have witnessed many examples of early retirees who become bored after a few months away from employment and desire the stimulation and opportunities their career offered.
These are just a few items to consider when evaluating if the VERP option is right for you and your family. At Market Street, we believe the best strategy to determine if you are financially able to take the VERP offer is through our financial planning process, which uses a statistical probability based approach to help you feel more comfortable in the decisions you need to make. We are making a priority over the coming weeks to help any current clients or new clients evaluate their VERP offer and determine, through the financial planning process, if they should apply for the program and retire with confidence.
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