As companies across the economy look to trim costs amid the coronavirus crisis, some big employers like Boeing are offering voluntary buyouts and early-retirement packages. Tempting as it can be to take the money, there are a number of questions to ask before making any decision.
Michael Foguth of Foguth Financial Group in Michigan said in many cases, workers ages 55 and up will be offered 12 weeks’ salary and health insurance in addition to payment for any accrued time off. The company may also offer a lump-sum payment or credit for additional years served in order to make workers’ pensions more valuable.
The company then may offer them a lump sum in exchange for giving up their monthly pension benefits. Foguth, whose firm helped Ford employees evaluate a 2017 buyout offer, said a fair offer for a pension buyout is 13 to 15 times a worker’s annual pension benefits.
Still, the value and structure of early-retirement packages can vary, and it pays to give careful consideration to any offer. What’s more, there are a variety of personal factors that should be weighed before any decision.
Here are some points to ponder if you’re offered an incentive to leave your company:
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The health of the company and the broader economy should factor into workers’ decisions about voluntary severance packages, said Jason Chepenik, managing partner of Chepenik Financial in Orlando, Fla.
In a “normal environment,” Chepenik said, it’s possible that an employer might offer a modest buyout, see how many people bite, and then increase the offer to get more takers. But with the coronavirus pandemic slamming the global economy, this clearly isn’t a normal environment.
“The difference in today’s world is that because of the cash crunch that this is causing companies, they can’t be as generous as they would normally be,” Chepenik said. “These companies are worried about having enough cash to even sustain themselves until the economy turns back on again, so those types of generous offers will go away.”
Ben Barzideh, wealth advisor at Piershale Financial Group in Barrington, Ill., encourages workers nearing retirement anyway to consider taking a buyout because oftentimes the offer signals financial distress. “If you don’t take it, a lot of times you’re still going to get laid off a little farther down the road, and you might not get anywhere near the benefits that you thought you were going to get,” he said.
Why is your company doing this?
Without a paycheck every two weeks, you will need to identify where your income will come from once any incentive payment is spent. If not a new job, then perhaps withdrawals from 401(k) plans, individual retirement accounts, or other savings.
While withdrawals from 401(k)s and IRAs typically are recommended only for workers ages 59½ or older, the recently passed Cares Act includes hardship provisions that allow for those younger to make penalty-free withdrawals during the pandemic. Still, Foguth said that with the market down sharply this spring, workers should try not to sell retirement assets until the market recovers.
Where will your income come from?
Early-retirement packages typically allow workers to keep their health insurance for a period after leaving the company, but they’re on their own after that, unless they have reached age 65 and can enroll in Medicare.
Companies with 20 or more employees must offer laid-off workers so-called Cobra health-insurance coverage for up to 18 months, and they may pay a portion of the cost for this continuation of coverage. Cobra benefits may begin following the period of continued coverage specified in the severance package.
“Health insurance is like another mortgage payment these days, so that’s a huge consideration for people,” Barzideh said. “If they don’t have a spouse who’s working and has good coverage that they can go on, they’ll have to go in the [government] exchanges and buy it, and it’s pretty expensive.”
Workers can research how much health-insurance plans cost in their area on healthcare.gov and then decide whether they will be able to afford insurance while unemployed. If the answer is no, it might make sense to decline a voluntary severance package.
How will you get health insurance?
Without a paycheck every two weeks, you will need to identify where your income will come from once any incentive payment is spent. If not a new job, then perhaps withdrawals from 401(k) plans, individual retirement accounts, or other savings.
While withdrawals from 401(k)s and IRAs typically are recommended only for workers ages 59½ or older, the recently passed Cares Act includes hardship provisions that allow for those younger to make penalty-free withdrawals during the pandemic. Still, Foguth said that with the market down sharply this spring, workers should try not to sell retirement assets until the market recovers.
Where will your income come from?
Sometimes the answer is yes, according to Bryson Roof, investment advisor at Roof Advisory Group in Harrisburg, Pa. He pointed to one client in his mid-60s who had recently been promoted to supervisor at a factory and was offered early retirement. The worker’s pension would be based on the average of his three highest-earning years, and he felt that his status as a supervisor made him less likely than a line worker to be laid off.
The employee turned down the offer and worked several more years, and his supervisor’s salary made his pension worth considerably more.
The employee turned down the offer and worked several more years, and his supervisor’s salary made his pension worth considerably more.
“It was an attractive offer, but when we did the math, there was much more upside to him staying on and working for three more years to maximize his benefits,” Roof said.
Employees typically will have at least a few weeks to decide whether to accept a buyout, and that’s an important window. If you were thinking about refinancing your home or buying a car, consider getting that done while you’re still an attractive borrower on paper. Once you’ve left the company and no longer can show that you have steady income, borrowing typically will become more difficult.
“Interest rates are low,” Foguth said, “so take advantage of those things that you’re going to be able to easily qualify for while you’re still employed” and have regular income.
Is there a good reason to stay put?
Early-retirement packages typically allow workers to keep their health insurance for a period after leaving the company, but they’re on their own after that, unless they have reached age 65 and can enroll in Medicare.
Companies with 20 or more employees must offer laid-off workers so-called Cobra health-insurance coverage for up to 18 months, and they may pay a portion of the cost for this continuation of coverage. Cobra benefits may begin following the period of continued coverage specified in the severance package.
“Health insurance is like another mortgage payment these days, so that’s a huge consideration for people,” Barzideh said. “If they don’t have a spouse who’s working and has good coverage that they can go on, they’ll have to go in the [government] exchanges and buy it, and it’s pretty expensive.”
Workers can research how much health-insurance plans cost in their area on healthcare.gov and then decide whether they will be able to afford insurance while unemployed. If the answer is no, it might make sense to decline a voluntary severance package.
How will you get health insurance?
Sometimes the answer is yes, according to Bryson Roof, investment advisor at Roof Advisory Group in Harrisburg, Pa. He pointed to one client in his mid-60s who had recently been promoted to supervisor at a factory and was offered early retirement. The worker’s pension would be based on the average of his three highest-earning years, and he felt that his status as a supervisor made him less likely than a line worker to be laid off.
The employee turned down the offer and worked several more years, and his supervisor’s salary made his pension worth considerably more.
“It was an attractive offer, but when we did the math, there was much more upside to him staying on and working for three more years to maximize his benefits,” Roof said.
Employees typically will have at least a few weeks to decide whether to accept a buyout, and that’s an important window. If you were thinking about refinancing your home or buying a car, consider getting that done while you’re still an attractive borrower on paper. Once you’ve left the company and no longer can show that you have steady income, borrowing typically will become more difficult.
“Interest rates are low,” Foguth said, “so take advantage of those things that you’re going to be able to easily qualify for while you’re still employed” and have regular income.
Is there a good reason to stay put?
Early-retirement packages typically allow workers to keep their health insurance for a period after leaving the company, but they’re on their own after that, unless they have reached age 65 and can enroll in Medicare.
Companies with 20 or more employees must offer laid-off workers so-called Cobra health-insurance coverage for up to 18 months, and they may pay a portion of the cost for this continuation of coverage. Cobra benefits may begin following the period of continued coverage specified in the severance package.
“Health insurance is like another mortgage payment these days, so that’s a huge consideration for people,” Barzideh said. “If they don’t have a spouse who’s working and has good coverage that they can go on, they’ll have to go in the [government] exchanges and buy it, and it’s pretty expensive.”
Workers can research how much health-insurance plans cost in their area on healthcare.gov and then decide whether they will be able to afford insurance while unemployed. If the answer is no, it might make sense to decline a voluntary severance package.
How will you get health insurance?
Sometimes the answer is yes, according to Bryson Roof, investment advisor at Roof Advisory Group in Harrisburg, Pa. He pointed to one client in his mid-60s who had recently been promoted to supervisor at a factory and was offered early retirement. The worker’s pension would be based on the average of his three highest-earning years, and he felt that his status as a supervisor made him less likely than a line worker to be laid off.
The employee turned down the offer and worked several more years, and his supervisor’s salary made his pension worth considerably more.
“It was an attractive offer, but when we did the math, there was much more upside to him staying on and working for three more years to maximize his benefits,” Roof said.
Employees typically will have at least a few weeks to decide whether to accept a buyout, and that’s an important window. If you were thinking about refinancing your home or buying a car, consider getting that done while you’re still an attractive borrower on paper. Once you’ve left the company and no longer can show that you have steady income, borrowing typically will become more difficult.
“Interest rates are low,” Foguth said, “so take advantage of those things that you’re going to be able to easily qualify for while you’re still employed” and have regular income.
Is there a good reason to stay put?