Voluntary Retirement: An Explainer (With a Downloadable Guide)

Retirement is usually something that workers plan for throughout the course of their careers. After all, it takes a decent nest egg plus a lifestyle plan to retire successfully. However, there is a form of retirement that can seemingly fall into the lap of workers: a voluntary retirement.

This form of a retirement is typically offered by a company in order to reduce their workforce without conducting a layoff or holding another downsizing event. By doing so, it allows workers to make the switch into retirement at an earlier age while also helping the company rightsize their company, aligning their talent with their business goals.

Voluntary retirement – also known as a voluntary retirement scheme – can be complicated, though. There are tons of pros and cons that come with such a scheme, making it weird for companies to implement.

To help with all of that, we decided to explore voluntary retirement, looking into what it actually is, why a company would use it, why a retiree would sign up for it, and – most importantly – how to make sure a plan of this nature is the right fit for your organization.

What Is a Voluntary Retirement Scheme?

Okay, let’s start with the basics: what exactly do we mean when we say voluntary retirement?

Well, it’s pretty much as it sounds: it’s when a company decides to offer retirement to workers in order to reduce their workforce without needing to hold a more intensive downsizing event.

A company would want to do this because it’s a lot easier to let people go if they opt to be let go. Why hold a layoff event when you could just ask your staff if anyone wants a retirement package to leave on their own free will? It solves the problem while also keeping your staff members happy, which is a big concern when dealing with right sizing efforts.

“Companies as diverse as Anheuser-Busch, Best Buy, Harley Davidson and Verizon all have one thing in common. These companies have all used buyout packages and early retirement plans to cut costs, reduce painful layoffs and adapt to an ever changing business environment,” reports Bonnie Conrad from Bizfluent.

“Early retirement programs and company buyouts offer a number of important benefits, both for workers and for their employers.”

Now, it’s important that any system that deals with layoffs or offboarding in general follow all of the local, state, and federal laws that protect workers from discrimination. We’ll touch on this more in a little bit, though it is important to mention off the top that if you want to implement one of these policies you will need to discuss them with your legal counsel to ensure that you are compliant.

This brings us to our next point:

Who Is Eligible for Voluntary Retirement?

Most of the time, employees gain eligibility to partake in a voluntary retirement after they have worked for an organization for a set number of years and have reached a specific age.

This means that not everyone is eligible for early retirement packages. In fact, most employees aren’t. It gets a bit confusing, though, because many voluntary retirement programs are made eligible to workers who haven’t yet reached the typical age of 65 that normal retirement requires.

“The policy may define who is eligible for early retirement by setting a minimum age and/or length of service. They may require retirement when a voluntary retirement application is submitted and not withdrawn within a certain time period,” reports US Legal.

“Public employee voluntary retirement programs are subject to state, federal, union, and/or agency laws and regulations.”

Based on these laws plus how the company structures their program, eligible candidates are selected. So, to use a completely fictional example, you could say that employees are eligible after they complete 20 years of creditable service and are over the age of 50.

However, it’s important to note that the benefits extended to these early retirees might be quite different than those extended to workers who reach the traditional retirement age. These benefits need fully explained to those who with to take you up on your retirement offer, giving them an appropriate amount of time to think about their options to ensure that they have fully weighted their decision.

For example, workers who are around the age of 50 would not be entitled to Social Security benefits or many healthcare benefits that come with retiring at a later age. 

“Complex rules govern vesting and payment of benefits, so careful investigation of applicable requirements should be made before opting for early retirement,” continues US Legal.

The most important part of selecting eligible candidates for voluntary retirement plans is to make sure that these individuals are actually taking up the offer voluntarily. This seems like a no-brainer, but the sad fact of the matter is that organizations have – in the past – used this type of benefit as a way to discriminate against older workers, forcing them out under the guise of a great plan (more on this later).

How Does a Voluntary Retirement Scheme Work?

Okay, so now that we know who is eligible for the program, how does it actually work? How do you put an actual plan together?

Well, this – again – largely is up to the company holding the incentive. However, to give you an idea, let’s look at a fictious example.

Let’s say a company wants to hold a voluntary retirement event. The first thing they need to do is to work with their upper management team and their legal team to discuss who will be eligible for the plan.

Once that’s done, the company needs to alert these individuals about the plan and give them a way to opt in. The best way to handle this is to be transparent when it comes to the offering. They shouldn’t reach out to the individuals directly in a one-on-one setting because this can lead to targeting issues. Instead, the company needs to be fully okay with anyone who meets the requirements to sign up.

The two best options would be for HR or upper management to send out an email to all employees with a link to the voluntary retirement guidelines on the website or on a company intranet.

On this page, there should be a space that details who is eligible, what benefits are going to be extended, when the incentive will become active, and what the next steps are for the employee to follow.

There should also be an ‘enrollment’ period so that eligible staff members can consider the transition before they decide to pursue it more thoroughly.

Using a form opt-in strategy like this also allows HR to examine who is signing up for the event, making sure they meet all of the requirements to do so.

Once the forms have been looked over, HR should then send a more official document that once again explains all of the benefits that are being offered to the retiree. For example, it can explain their buyout rate, how their life insurance policy might change, how their healthcare service might change, and so on.

The name of the game here is honesty and transparency. The company needs to make sure workers are fully aware of what is going on, how it will go down, and what benefits they will receive. You don’t want to spring random changes on the retirees because – not only is it ethically and legally wrong – but the transition to retirement can be tough even without trickery from an employer.

After all of this is settled, the employees start to enter their retirement at a certain date that is decided within the contract they will sign to fully opt-in. HR should also meet with the candidates to help them offboard successfully. 

What Are the Pros of Voluntary Retirement Plans?

Now that we know how a plan typically operates – though, like we said, it will look different depending on who is holding the incentive – let’s take a look at the pros of a voluntary retirement incentive.

Let’s start with the company first.

A company stands to gain a lot from any right sizing event because it helps them align their talent needs with their business goals.

When it comes to voluntary retirement, the business can also avoid a lot of the pitfalls that comes with workforce planning, such as a wounded reputation after a layoff event or a decrease in morale inside the workplace. Though a downsizing event may occur for numerous reasons, the general opinion of holding any type of layoff or mandatory redundancy isn’t well-received by the public or by the surviving staff because it gives the message that something is wrong.

With a voluntary retirement plan, companies can get around all of this because it’s a nicer, more proactive way to hold a downsizing event that offers a benefit to the company alongside the staff members that take it.

So, in a nutshell, the benefits of voluntary retirement incentives for an employer is that it allows them to rightsize the company, future-proof their workforce with workforce planning, and skip a lot of the downsides that come with redundancy events.

Now, let’s move on to how the plan can be beneficial to the employees who take the company up on the offer.

“Usually payments are less than what you would get had you waited to full retirement age, as companies assess retirement packages based on the number of years of service,” writes Wanda Thibodeaux from Sapling.

“However, the advantages of voluntary retirement may outweigh the risks, depending on your circumstances.”

Thibodeaux goes on to say that taking a voluntary retirement package can give retirees time to pursue hobbies that they’ve always wanted to while they are still healthy to do them.

She also notes that retirees can make more money because they are not obligated to never work again. They just were terminated from one company. This means that they can take another full time job if they want, allowing them to have more money than they had before.

The final thing she says is that retirees can enjoy a lower level of stress because it gives them a choice to not be in a hectic career. This point largely depends on the person, the role they have, and many other things. However, it stands to reason that having a choice to move on – whether they take it or not – is always a good thing because it give the worker options.

Now, to the cons:

What Are the Cons of Voluntary Retirement Plans?

The biggest problem with voluntary retirement plans is that they impact the workers who have the most knowledge about your company. This means that a proper plan for knowledge transfer must be in place before a voluntary retirement event happens.

Consider this: you’ve had an employee working at your organization for 35 years. They know the ins and outs of every aspect of their job. They are experts in their field. However, when they see that you are offering a voluntary retirement plan, they sign up, costing you a lot of knowledge.

This can be the problem with these types of plans. Older workers hold a vast amount of job knowledge, leadership competency, and are experts in their field. By trying to thin out your workforce, you risk creating a brain drain where your best talent leaves to either retire fully or work somewhere else while earning their retirement benefits.

So, the takeaway here is that it pays to properly plan your workforce. This planning starts when a person is hired. You have to make sure that you have a plan in place to allow them to eventually leave without taking all of their time-honed knowledge with them. Proper development of younger workers plays a role here, too. After all, if there is no one to fill the role, what then?

As for the retirees themselves, they might end up losing some of their benefits by retiring before the age of 65, the typical age of retirement.

“The sooner you start to take Social Security, the lower your benefits will be,” reports Greg Daugherty from Investopedia.

“If you were born in 1960 or later, for example, and you start taking benefits at age 62, the earliest age at which you’re eligible, your monthly benefits will be 30% less than if you wait until age 67, which Social Security refers to as your “full retirement age.”

He goes on to say that early retirees will also have to stretch their retirement funds out further than someone who waits longer to retire, will typically have to find a new healthcare provider, and may become bored with their new situation. We’ll touch more on that last part in a bit, however, it stands to reason that the financial side of retirement needs to be addressed and thought over before a retiree takes up the offer for early retirement.

Okay, next up are a couple key things employers need to remember when implementing a voluntary retirement plan, starting with the biggest of all: the need to make sure all voluntary retirements are completely, 100 percent voluntary.

Voluntary Retirement Schemes Have to Be Completely Voluntary

There are numerous laws – the most well-known being the Age Discrimination in Employment Act (ADEA) – that govern how employers handle offboarding when it comes to older workers.

When it comes to voluntary retirement, these waters become muddled because employers can attempt to get around this laws by offering voluntary leave for employees, focusing on the older workers who they want to push out.

“There are some signs, however, that not all “voluntary” retirements occur fully by choice. Subtle pressure to move on may be behind some “free-will” decisions to stop working, suggests a new publication from the Society of Actuaries (SOA) Committee on Post-Retirement Needs and Risks,” reports Sara Rix, a senior policy maker at AARP, in an article for The Huffington Post.

She continued by saying:

“The Decision to Retire and Post-Retirement Financial Strategies summarizes eight focus group discussions on retirement decision-making with men and women who had been retired for up to 10 years as of May 2013. These retirees were “resource constrained,” that is, they had some savings but not necessarily enough to maintain pre-retirement lifestyles or to live worry-free throughout retirement. They had nonetheless opted to retire.”

Though it’s hard to completely say one way or the other, Rix is pointing out that it seems like these older workers were more or less forced into their ‘voluntary’ retirements. These actions then go from something nice – an early retirement package paid for by the company – and turns it sour.

There are numerous laws out there that attempt to protect older workers from this type of discrimination. So, make sure you check in to see what ones impact your organization, make sure you are offering voluntary retirement for the right reasons, and make sure you put your people first.

After all, these individuals have been working at your company for quite some time, giving much of their days to your business. The least you could do is not force them into a situation that they will fail in.

This brings us to our next point:

Make Sure Voluntary Retirement Is the Right Move

Now, this is an article about voluntary retirement and how it works, but we’d me amiss if you didn’t add a section that talks about the other options you have when it comes time to fix staffing issues with longer term workers.

It stands to reason that you may not want to use voluntary retirement to rightsize your company because it greatly impacts the employees who have been working there for dozens of years. These employees have amassed an incredible amount of knowledge about their jobs, becoming experts who can make it challenging for someone else to step into their role.

This is when you need to figure out what the staffing issue is and if there is any way for you to fix it without laying people off or offering them another out like voluntary retirement.

“More flexible work schedules, including phased retirement, as well as job sharing, shifts to less demanding work, and job redesign are among the ways that some innovative employers attract and retain workers of all ages,” continues Sara Rix to The Huffington Post.

“For example, to meet production goals in the face of a projected sharp increase in the average age of its workers, German auto manufacturer BMW introduced adjustments, such as wooden floors that are easier on the knees, larger type computer screens, chairs that allow laborers to work sitting down, and easier-to-access cars on the assembly line.”

In this example, we see a company that – instead of trying to get their older workers out – made it easier for them to complete their tasks, allowing them to keep working in the role that they know so much about. This negates the talent problem that can arise when a bunch of older workers leave the organization at one time.

Understand the Hidden Side of Retirement

The final note we want to make about voluntary retirement and retirement in general is that many organizations have simply not considered one of the biggest parts of the move for retirees: the social and emotional side of retirement.

For far too long, retirement planning has been all about finance. Do you have enough money saved away to retire successfully? Are you of an age that allows you to take the full Social Security benefits? And so on.

While planning for the financial needs of retirement is vital for success, why are we ignoring the personal effects that come along with going from a full time job to an abundance of free time?

Think about it: if you worked at the same place for 30 plus years, you have a routine built into your day. You know you will see your friends and coworkers, have activities that need handling, and have a purpose every single morning.

When all of that is suddenly gone, you can be left feeling more stressed because you haven’t considered what your next step should be.

This is why we recommend using a retirement lifestyle plan in conjunction with voluntary retirement offerings to make sure your employee can continue their life happily without a full time job.

Not only will this ensure the success of individuals who have worked for your organization for dozens of years, it also helps you plan a knowledge transfer to their replacement, allowing you to avoid the negative aspects of voluntary retirement.

By combining both of these strategies you and your employee will be on a better footing. You’ll know what you need to cover to ensure that your company continues marching forward and the retiree will know what they plan on doing next whether that be finding a new full time job, exploring career opportunities they’ve always thought about or simply spending more time with family.

Let’s wrap all of this up.

Voluntary Retirement: The Key Takeaways

We’ve covered quite a bit here. Here’s everything wrapped in in one place:

Voluntary retirement is a way for companies to rightsize their organizations by offering early retirement packages to eligible employees.

Employees can be eligible based on a number of factors. Typically, eligibility is determined by the number of creditable years they have worked at the organization and how old they are.

Implementing the incentive requires the counsel of your legal team to make sure that you are following all of the state, local, and federal laws that protect older workers.

When it comes time to announce the plan, make sure you do so with utmost transparency, allowing all eligible staffers to apply. Use an online form to keep everything on track, make sure you go over all of the benefits being offered and how they will impact other benefits like Social Security and others.

Consider both the pros and the cons of voluntary retirement plans. Can you save your older, knowledge staff members from leaving by introducing more flexible work arrangement? Is phased retirement something you could offer instead?

Make sure all voluntary retirements are actually voluntary. You cannot force people out of your organization just because you want to or because they are older now. That’s discrimination.

Consider adding retirement lifestyle planning to your incentive to make sure employees can transition easily out of the workplace while also retaining their knowledge, passing their skills on to new leaders.

If you follow all of these steps and work with your upper management team plus take the advice of your legal counsel, you can implement a voluntary retirement incentive that helps rightsize your workforce with the need of mandatory layoffs.

Josh Hrala

Josh is an HR journalist and ghostwriter who's been covering outplacement and offboarding for over six years. Before pivoting to the HR world, he was a science journalist whose work can be found in Popular Science, ScienceAlert, The Huffington Post, Cracked, Modern Notion, and more.