Buy outs and early retirement packages are increasingly becoming a part of the American landscape. Not a day goes by when some group of employees somewhere are offered financial incentives to retire early. If it happens to you, this is what you should consider.
Is this voluntary or a forced offer? If it is voluntary and you take it, you can’t apply for unemployment benefits. Forced retirement is akin to a layoff where you either accept the deal or else. Your chances of getting unemployment are higher under the latter circumstances.
Clearly, the largest single benefit of a retirement incentive is the upfront financial reward. These incentives are typically tied to the number of years of employment and can be either a lump sum or some form of annuity. The simplest rule of thumb is if you were planning to retire anyway in a year or two and the company offers you a two-year severance package that’s free money and you should take it.
If, on the other hand, you were planning to work for another four or five years, you must weigh the benefits carefully. For many workers, the most important factor is whether the company offers health benefits. A study by Fidelity Investments found that a 65-year-old couple retiring today without employer-provided health benefits needs at least $200,000 to finance out-of-pocket medical costs. Obama Care may reduce that number somewhat, but it will still be significant, especially when you consider things like Medicare premiums, co-payments and Medigap expenses.
Sometimes the first offer is not the final offer. If your company really needs these cut backs, you may be able to negotiate better terms. You might be able to improve any health benefits, or include help in a job search or additional training. For some, early pension payments might be possible.
But what if you just love your job; can’t imagine what you would do without it and can’t afford to retire? Much will depend on whether the offer is a prelude to larger lay-offs in the future or is purely voluntary.
There are risks in not taking an early retirement or incentive buyout package that readers should understand. If you have been singled out by your company, there could be a target on your back. If your company is in some financial difficulty and looking to cut back even further, your days could be numbered regardless of your decision. In which case, the first offer you receive is as good as it gets. The next wave of lay-offs may find you unemployed with no incentive package at all.
This could also be a great opportunity, if handled right. You might be tired of working there and this could be your ticket to a new and better job. If so, start looking right away. The economy is picking up and job opportunities are better than they have been for several years. If you find a job quickly, this buy out could be just like a big bonus and an opportunity to invest it towards your retirement. Your new job does not even have to pay as much, thanks to your severance package.
For others, it could be the starting point for that business you always wanted to create. You may be old enough and with enough experience to become a small business owner, even if you are the only employee. You might even offer to consult for your old company at a price. The point is that an offer is better than no offer at all. Treat this as a challenge and an opportunity, rather than the end of the world.
Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or e-mail him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.