Offered a Buyout? Considerations to Make a Confident Decision
July 12, 2019 | By Brenna McLoughlin, CFP®
Employees of large corporations may some day be faced with a major decision to make: whether or not to take a buyout offer, voluntarily terminating employment for some sort of financial incentive. An offer of a certain number of weeks or months of severance pay can be very attractive, and may be the right choice, though certainly not an easy one. Here are some considerations for employees to make an informed decision.
How confident are you in your company or your job?
Of course, declining to take the buyout is no guarantee of longevity in your job. If the buyout does not sufficiently reduce costs for your employer, layoffs could be next. Getting a firm handle on your financial situation will help you weigh how great a risk you could be taking by staying with your job and opting out of the buyout.
Are you ready to retire?
If you were to take the buyout, would it be your goal to never work again? If so, you must review your preparedness for retirement. Start by getting solid on your living expenses now, and what you might like to spend when you have more free time to do things like travel. How much after-tax money will you need per year to cover these expenses? How does that number compare to what you have saved, and what you expect to receive from pensions or Social Security? It’s crucial to think about how many years you can afford to be supporting yourself in retirement, and not always easy to determine, given that costs are almost certain to rise over time, and life expectancies are rising.
Is your goal to keep working?
You may be planning to look for a new job after taking the buyout. Whether because you know you can’t afford to retire yet, or you simply enjoy working and want to continue, you should consider what you’d like to do next and how long it could take you to find an opportunity of that kind. What are your expenses, and will the severance package cover your financial needs until you’re established in your new role? Think about the compensation you might be offered for a new job, as well as the employee benefits, and how they compare to what you’ve had with your current employer. Do you stand to get an upgrade in pay and perks, or will you have to reduce your lifestyle in order to make a transition?
How will the buyout impact your taxes?
Depending on how the severance is paid out, you may be faced with one or more years of steep income-tax liabilities. Though the package may sound generous, think of what you’ll actually be taking home after-tax. The severance itself may push you into a higher tax bracket than you’re used to, so the cash you actually receive is likely to be less than you would get in your regular paychecks. Consult your financial planner and tax preparer to find out if there are any ways for you to take some of the sting out of a high-tax year, like increasing your retirement-plan contributions before leaving your job, or lumping itemized deductions together if possible.
What happens to your equity compensation?
You may have been granted equity compensation in the form of stock options, restricted stock units (RSUs), or other types of awards. Review your award agreements as well as the information on the buyout to find out how your vested and unvested equity will be treated if you accept the buyout offer. Your employer may offer automatic vesting if you take the buyout. This, in addition to any equity you opt to sell will add to your taxable income, creating a greater need to think strategically about your tax planning.
What will you do with your retirement benefits?
If your employer offers a traditional pension, you should request a projection from your pension-plan administrator. You should review and consider all of the payout options in the context of your expenses. What would you need from your pension to sustain your lifestyle? You may feel comfortable forgoing the option of lifetime annuity payments to take your pension as a lump-sum, rolled over into an IRA that you can invest for the future. If considering the lump-sum option, know what rate of investment return you will need in order to have that sum sustain you throughout your life. You’re likely to have a multitude of annuity-payout options to consider. Are you only hoping to have income for your lifetime? If you’re married, can you afford to take a lesser benefit to ensure an income stream to you and your spouse for life?
In the case of retirement plans like 401(k)s or 403(b)s, the options are typically more straightforward. The first question is, how much of the account balance is vested and yours to keep if you leave your job? Contributions made by you will be 100% vested. Employer contributions are subject to the rules of your plan; these may be completely or partially vested, or unvested. Unless the buyout provisions include vesting of unvested amounts, you could potentially lose the unvested account balance when you leave the company. If you choose to take the buyout, the vested balance is yours to roll out, either into an IRA or your next employer’s 401(k), or to remain in your former employer’s plan.
Consider other post-termination benefits, too. What health-insurance options will be available to you from your employer, a health-care exchange, or Medicare? Which will best fit your budget and your medical needs? You should also inquire about any group life, disability or long-term care insurance coverages that may be convertible to individual policies. It may be in your best interest to keep these, especially if you or one of your dependents have health issues that may preclude you from obtaining insurance on your own.
There is no one-size-fits-all answer to the question of whether or not to take a buyout. The best way to prepare yourself in any of these scenarios is to engage an expert to produce detailed cash-flow projections specific to you and your life. This will allow you to make a decision with confidence and improve odds of success.