To paraphrase The Clash: Should you stay, or should you go?
Knocked by revenue losses and dealing with new business models triggered by the coronavirus pandemic, plenty of companies are exploring ways to shore up their bottom line and get lean.
A voluntary buyout offered to employees is one way is to cut payroll and benefit compensation.
This is a tried-and-true move, and there’s nothing nefarious about it beyond the fact that it’s often older workers who are targeted.
In the last year, for example, workers at Delta DAL,
A buyout certainly trumps a layoff, in my opinion. You can leave with your head held high. After all it was your choice to accept it. And you can brag that the offer was too good to leave on the table.
But can you afford it? Does it make sense for your unique situation?
If your job outlook is decent, taking a buyout can be a sweet cash-infusion and a boost for your future financial security.
The decision is both financial and emotional. In most cases, it’s worth strongly considering. If you’ve been offered one, it’s likely that you have already been deemed expendable. Sorry about that. And there’s no guarantee that you won’t get axed in a layoff down the road where there is no enticing buyout offer on the table. Severance pay is usually one week, or two weeks’ pay for every year you’ve been on the payroll with no wiggle room for negotiation.
Age matters
Whether the timing is right for you will often depend on your age. Your life situation at 50 and at 60 could be miles apart in terms of your desire or need to continue to earn income and even how you want to spend your money.
It’s perfectly reasonable that if you’re nearing 65, when Medicare kicks in, and full Social Security benefit eligibility starts at 66 or 67, you might see the writing on the wall and take the offer without too much angst.
Moreover, if you’ve got ample savings, a well-funded 401(k) or IRA accounts, and no hefty debts hanging overhead or major expense soon, you’re probably in the right place to accept it and not look back.
Timing matters
The state of the job market and economy when you get your buyout offer is a huge factor. The number-crunching is critical if your outlook for a job is dicey, for example, or if you’re accepting the voluntary buyout as a true path to retirement. Here’s some advice for older workers looking for a job this year.
Financial checklist for a buyout decision
Understand the deal being offered. These packages are typically complex. The sum offered is generally based on the number of years you’ve worked for the company and your salary like a standard severance offer, but frequently more generous. It could include extended health insurance coverage, accrued vacation pay and bonuses, life insurance, career assistance with finding another job from an outplacement firm, or assistance with financial planning.
Keep in mind that although a lump-sum buyout can make your eyes light up, there are taxes to consider. It can balloon your annual income for the year you accept it. That can mean a whopping tax bill. It might be worth taking the money in stages, if your employer offers that option, to help manage that bill.
If you’re one of the lucky ones with an old-fashioned traditional pension, you will also need to scrutinize the pay-out options. The payout might be a lump sum, have an annuity alternative, or lifetime income payments.
A lump sum can be appealing if you’re concerned that your employer is on shaky financial grounds. The Pension Benefit Guaranty Corp. guarantees your pension in the event your employer files for bankruptcy, but only up to a specific amount that’s adjusted every year. If you roll your lump sum pension payout into a traditional IRA, you can defer taxes until you start taking withdrawals.
Married couples, too, have special concerns. Planners typically advise selecting to take a pension with a joint-and-survivor payout, payments will last for as long as one spouse is alive.
Review your health insurance coverage status. One of the biggest hurdles you might face if you accept a buyout is losing your health plan. From my experience, most buyouts come with around a year of coverage. Access to an employer health plan might be something you can discuss keeping for a prolonged period of coverage.
Health insurance might not be a big deal for you if you’re confident that you can land a new job that provides an employer-provided health plan, or you have a spouse who is still working, and you can get coverage through his or her employer. Otherwise, investigate Affordable Care Act options through healthcare.gov or your state’s marketplace.
That said, if you’re on the cusp of eligibility for Medicare (or don’t have a new employer coverage around the bend), to tide you over, you can typically continue enrollment in your existing plan for up to 18 months — perhaps longer — under a federal law known as COBRA, which stands for the Consolidated Omnibus Budget Reconciliation Act. It requires firms with at least 20 employees to offer this option.
Normally, you have up to 60 days to elect COBRA and another 45 days to pay the first premium (covering the period dating back to your coverage loss).
The downside: COBRA premiums are steep. Figure on at least $600 a month per person — or more.
Finally, is long-term care of concern? Are you currently covered by a long-term care policy at work? If so, can you negotiate to hang on to it? It might not be worth it, but it’s a line item to investigate.
In a recent column, I wrote about Fidelity Investments’ “2021 State of Retirement Planning Study.” Most respondents underestimate the cost of out-of-pocket health care for a couple in retirement, with 37% guessing between $50,000-100,000. In fact, for a couple retiring at 65, the actual average cost throughout their retirement is $300,000 to cover medical expenses, an 88% increase since 2002, according to Fidelity’s latest report. For single retirees, the 2021 estimate is $157,000 for women and $143,000 for men.
Examine your income sources. Carefully review your projected income (a new salary, Social Security benefits, pensions, distributions from personal investments and savings) and outlays.
Even if you aren’t interested in a career transition, part-time of contract work can be a safety net to stave off dipping into retirement funds and springing into Social Security benefits. Although you can start receiving Social Security retirement benefits as early as age 62, delaying tapping into your benefit can boost your payout over time. For each year you defer taking benefits past full retirement age up to 70, you get an 8% increase in delayed-retirement credits.
Many major mutual fund companies have retirement calculators on their web sites that are useful for this financial snapshot. The Social Security Administration website can let you get an estimate of your future Social Security benefits and a record of your lifetime earnings history. The AARP website also has a useful Social Security benefits calculator.
Sketch out a budget. You should have a grip on what income you will have each month and how much you spend, as well has your insurance coverage. Websites like Mint and You Need a Budget (YNAB) provide software to track spending and set up budgets.
Hire a financial adviser. You might already have someone on your team. If not, an expert can help you work through your specific buyout puzzle. I advise working with a fee-only financial adviser. And look for one who is a fiduciary — which means he or she puts your interests first. You might ask for recommendations from people you trust. It’s smart to interview a few to see who you are aligned with and gets you from a holistic standpoint.
Some databases to search for a certified financial planner: the nonprofit Certified Financial Planner Board of Standards, the National Association of Personal Financial Advisors, the Financial Planning Association and Wealthramp.com.
There’s a lot to gauge but chances are there won’t be trouble if you go and double trouble if you stay, as The Clash sing.
