Over the past few months, Microsoft has made headlines by offering a select group of employees the chance to take an early-retirement package.
This is the first time Microsoft has made an offer like this, and as the employees who have elected to take the package begin to make their exit, it’s become clear that this offer has a lot to teach all of us about retirement planning and readiness.
The offer
Microsoft rolled out what it is calling a Voluntary Retirement Program (VRP), a one-time offer for certain employees to retire early with a specific set of benefits. Employees who have elected to take it will receive a certain number of months of severance based on their years of service, continued vesting of company equity and continued health insurance for a defined period.
The Microsoft execs I’ve talked with say they have been strategizing things like cross-country moves, future healthcare costs and wondering how to mobilize company stock to help achieve their goals.
With layoffs on the rise and AI-fueled job fears dominating the headlines, these types of concerns are increasingly common for modern executives. It turns out that Microsoft’s VRP is forcing questions for their employees that can serve as a retirement readiness checklist for all of us as we plan for the unexpected.
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Here are five things to keep in mind.
1. Retirement readiness has a number
Microsoft gave its employees a number and left it to them to assess if it was worth making the jump to retirement. They have had to choose whether the offer helps them achieve, or even accelerate, their retirement goals.
For modern executives, there is always a number that can gauge how ready you are to make a change. That number could be described as your “financial freedom number,” and it essentially tells us if your current savings and investments can support an early retirement.
It’s very common for executives, even those with a million dollars or more of company stock, to question whether they are truly on track. This is a scary transition and an understandable fear, but a few targeted conversations and some careful math can readily help address things like:
- Can your investments support your goals?
- Do you need additional income after you retire?
- When do you need to sell company stock?
- How long will your money last? What should you pass on to others?
2. The healthcare bridge
Look closely at Microsoft’s package, and you’ll notice it includes up to five years of continued medical, dental and vision coverage. It’s hard to overstate how often healthcare costs keep people anchored to jobs.
If you retire before 65, you are not yet eligible for Medicare. You have to bridge the gap, and if you’re in your late 50s, that bridge can be pretty expensive. People go to great lengths and mental gymnastics to solve this problem.
I’ve talked to execs over the years who consider retiring and getting the proverbial “part-time job at Starbucks for health insurance” or even moving to another country to lower their healthcare costs.
Microsoft addressed that problem for its retirees by handing them a multiyear runway. The rest of us have to build our own runway, through the ACA marketplace, a working spouse’s plan, COBRA or dedicated savings earmarked for premiums.
Weighing the various options for healthcare can be overwhelming, but there are a few valuable tools for people considering early retirement.
Create an annual cash flow projection. Mapping out your income and expenses shows you the impact of changing healthcare expenses.
Understand ACA subsidies. For early retirees, even those with large portfolios, it’s possible to control your income levels in key years to qualify for additional ACA subsidies to assist with insurance costs.
Include your new costs in your long-term plan. Health insurance costs are almost always discouraging, but if you have weighed your options carefully and included the cost in a long-term financial plan that works for your family’s goals, you are prepared to make moves more confidently.
As we make our plans for entering a new phase, we all have to do the math on what options will work for our finances, but the bigger challenge is likely to be accepting that cost so that you can move into early retirement with a sense of actual freedom.
3. Every decision is a tax decision
Put yourself in the shoes of a Microsoft employee taking the VRP:
- You have half a year of taxable W-2 income already
- You’re being paid an additional eight to 39 weeks of severance pay as cash
- You will continue to have stock vest (and taxed) over the coming months
- You may have to sell stock to kick off your retirement, incurring capital gains taxes
It’s tempting to think this scenario is entirely unique, but in many ways, it’s a common story when someone finally makes the jump from corporate work to early retirement.
For employees leaving midyear, the time is now to make your first tax projection. Understanding your likely tax bill is going to inform how much cash you need to set aside for the IRS and what other moves you need to make this year vs future tax years.
This may end up being a higher-than-average income year for Microsoft employees taking the offer, creating opportunities for charitable-giving strategies, tax-loss harvesting and quality long-term planning.
For other would-be retirees, the opportunity may cut the other way. As you leave your job, you may find you have an especially low-income year, which can open a window for planning moves like Roth conversions and capital gain harvesting.
At Reach Strategic Wealth, we call these different phases of someone’s life Strategic Planning Windows, which we visualize like this:
(Image credit: Zachary Ashburn)
Whether it’s time as an employee, early retirement or taking a consulting role for the first time after you exit, each one of these windows brings unique opportunities, and each one is open only so long.
Correctly identifying which planning window you’re in and what moves are open to you in that window are vital in making the most of your money.
When it comes to early retirement strategies like selling company stock, performing Roth conversions, giving to charity or beginning to live off of portfolio income, taking advantage of your Strategic Planning Window requires thoughtful planning and must include multiple years of tax projections to help you understand the impact of any potential moves.
4. You can’t eat stock for breakfast
Microsoft is letting the employees who take the VRP continue to receive stock vests for six to 12 months after their exit date.
Like many executives, senior Microsoft employees likely already have a concentration in their company’s stock. This means that as they make their transition, they will be faced with decisions around when to sell stock to fund their retirement.
It’s not that you need to sell company stock all at once — it’s that you need to clearly articulate your goals to understand your cash flow needs so you can make moves tax-efficiently.
I laid out a framework I use for exactly this decision in the article Tied Up in Knots Over a Concentrated Stock Position? This Strategy Will Help You Unravel.
It’s quite common to see people retire with a robust balance sheet made up of company stock that can’t support regular spending on its own.
In other words, it’s great to have stock, it might even make you rich on paper, but you can’t eat it for breakfast.
There are many different strategies available to sell and diversify concentrated stock positions — exchange funds, direct indexing, long/short investing and charitable donations, to name a few.
The problem isn’t a lack of tools — it’s that, as we noted earlier, every decision is a tax decision, and when it comes to selling company stock, it’s very easy to get “analysis paralysis” while considering the options.
To overcome this, we start with learning your family’s very specific goals so we understand your income needs and then move on to the technical strategies that may let you pursue them tax-efficiently.
In my experience, getting those steps out of order is a recipe for staying stuck.
5. The hardest part probably isn’t financial
Microsoft gave eligible employees a window of about a month to decide. That deadline is doing something not-so-subtle: It’s forcing a choice that people often postpone indefinitely.
It’s very common for a family to be financially ready to make a move well before they are mentally ready for it. The desire and confidence to leave don’t necessarily come directly with a given account balance.
You’ve likely heard before about the spouse who wants their partner to leave the corporate world, but it keeps getting put off. It’s the cycle of sticking around for one more bonus or stock vest. Or the executive just can’t imagine what post-corporate life will be like.
These things can often become the real golden handcuffs, not just the equity that vests if you stay, but the identity and routine that make you stay put.
The tool that breaks this way of thinking is almost embarrassingly simple: A year-by-year cash flow plan. When you can see the income, the taxes, the healthcare and the portfolio drawdown laid out side by side, the abstract fear of “Can I really do this?” gets replaced by a concrete answer, whether it’s “yes” or “no.”
A deadline like Microsoft’s is uncomfortable precisely because it demands that clarity. The good news is you can create the same clarity for yourself, proactively, so you are ready to make the jump on your terms.
Making a plan before your employer forces it
The idea of a well-planned, one-time retirement date is alluring but elusive, almost to the point of being mythical. Many times, it seems that layoffs, caregiving responsibilities or health needs force our hand when it comes to retirement decisions.
In other cases, retirement from the corporate world is just a bridge to consulting or re-entering the workforce down the line.
Microsoft decided that changes to the org chart were needed for its company plans. Whether that wave reaches your industry next, the offer it put together is an opportunity for the rest of us to learn. It prompts us to map out these key points and to check in on our own plans as we prepare for a new phase of life.
The families who navigate these steps well are rarely the ones who guessed right about the stock market. They’re the ones who take the time to articulate their goals, understand what strategic planning window they are in and execute the necessary moves tax-efficiently.
