Ready Or Not, Early Out

Recession fears may ebb, but corporate blood continues to flow. American companies announced 147,045 job cuts in the first four months of this year- 60 percent higher than last year, estimates People Trends newsletter. Companies continue to cut back by offering retirement plans. But the deals worsen with every wave: you may find yourself jumping at the first offer and abandoning the work-till-I'm-80 ethic.

If you retire before your time, here's what you need to know about taxproofing your severance, protecting your pension and staying insured.

First, think about the tax consequences when you're offered severance pay, counsels New York certified public accountant Robert Clarfeld. Many companies offer workers the choice of a lump sum or stretched-out payments. If your 1995 earnings will be more than the $61,200 social-security tax maximum, take the lump sum. You'll save $320 in FICA taxes for every $5,000 in severance.

Go for the long-term payout if you expect to drop tax brackets next year. For example: if your postretirement annual taxable income totals $39,000 or less on a joint return, you'll probably be in the 15 percent tax bracket in 1996. Income-tax savings on $5,000 of severance would be $650 if you dropped one bracket; $800 for dropping two. Some companies extend your fringe benefits as long as you are on a severance stream. Weigh them before deciding to cash out.

One mistake employees make is that they pass up an early-retirement offer, largely because they figure they'll get a bigger pension if they work longer. But in some traditional defined benefit pension plans, the longer you work, the less you'll get.

For one thing, companies usually sweeten the pension pot to get you out early. A company might throw $160,000 at a 55-year-old whose pension would be worth only $120,000 if he worked 10 more years, says Richard Ostuw, chief actuary at benefits consultants Towers Perrin. Even without the buyouts, new pension rules may shrink lump sums in the future, so there's not much point in hanging on for the big payout.

Once you take your money, what do you do with it? Protect its tax-deferred status but keep it handy for emergencies. You can do that by rolling it over into a separate IRA account that won't impose its own early-withdrawal penalties on top of the taxes plus 10 percent that the government takes if you tap it before you are 59 1/2.

If you need the cash, try this technique from Pioneer Funds' pension pro Marcy Supovitz: tax-code exemption "72(t)" allows anyone to take penalty-free IRA withdrawal early, as long as the amounts withdrawn are calculated to last his or her life span. A 50-year-old could take as much as $18,000 a year out of a $200,000 IRA. The catch: once you start the withdrawals, you have to keep them up for at least five years.

Early retirees are radioactive to health-insurance companies. If you are between 50 and 65, they will use everything from unaffordable premiums to broad exclusions to discourage you from signing up.

And don't look to your employer. Only about 1 in 10 firms provides health insurance for its under-65 retirees, according to benefits consultants Foster Higgins; some say they will, but then back out later. Just ask Unisys retirees who expected health coverage for life at $2.25 a month. Last month the Third Circuit Court of Appeals upheld the company's right to raise those premiums to $750 a month.

If you're losing coverage, you can usually pay your own way in your company's plan for 18 months, but there's a danger in that: a serious illness contracted during this so-called COBRA coverage might make you uninsurable in the future.

Health-insurance wholesaler Martin Roehkind offers these tips: Fill post-COBRA gaps with a six-month policy while you comparison-shop through an independent insurance broker for the reputable companies willing to take you on. Keep costs low by taking high deductibles. A healthy 55-year-old couple can find catastrophic coverage for $445 a month. Some companies to try are Time, Golden Rule and Centennial Life Insurance Co. If you're stuck with a pre-existing problem, sign up with Blue Cross or your local HMO next time it declares open season for all comers.

Avoid policies with large loopholes. The American Association of Retired Persons' best offering is a limited plan that covers surgeries, hospital stays and doctor visits, but not cancer therapy or costly tests. That's how the AARP keeps it affordable for the next round of retirees, says the association.