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Buyout Offers: What to Know Before You Go

As COVID-19 continues to roil the global economy, we’ve seen more and more companies offer buyouts to their employees. Earlier this year, several airlines announced voluntary separation or early retirement packages as stay-at-home orders prevented travel. Boeing, which supplies aircraft to the industry, also announced an employee buyout.

Even before COVID-19, buyout offers to older workers were becoming more and more common as companies try to trim expenses and streamline operations. Earlier this month, Ford Motor Company announced that it would offer buyouts to 1,400 white-collar workers as part of a restructuring effort the company started in 2018. Employees will have until Oct. 23 to decide whether to accept the buyout or risk being laid off later.

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It’s common for corporations to offer early retirement buyouts to older employees with higher salaries who have been on the job for more than a decade. But deciding whether to take a buyout depends on many factors. Here are some of the things you should consider.

  1. The buyout offer. Most companies offer a packet of information describing the buyout offer, and sometimes those packets are large and confusing. Be sure to read all of the documents before making a decision. Jot down your questions and make an appointment with your Human Resources department to get answers. Take notes and confirm your conclusions. Discuss your options with your family and your financial adviser before making a decision.
  2. Your age. If you are a year or two from your planned retirement age and have savings you can access to bridge the gap between unemployment and full retirement, you may be able to take the buyout and live off of your cash or liquid assets until it’s time to claim Social Security or begin tapping your retirement accounts. If you are in your early 50s, though, you may need to find another job or start a business, and ­­— in our current economy ­­— finding a similar job may be difficult.
  3. Your health. One of the major reasons people give for refusing to take a buyout is their fear of losing health benefits. If the buyout package offered by your employer does not include extended benefits, shop around to determine what health insurance would cost if you had to buy it yourself. If your spouse receives health insurance as a benefit, you may be able to be covered as a dependent.
  4. The tax implications. Several aspects of your buyout could have tax implications. One involves whether your employer plans to pay your buyout as a lump sum. If so, the amount could push you into a higher tax bracket. It may also be wise to convert some assets to a Roth IRA if your tax bracket is lower now than it will be in the future. Seek help from a tax professional or your financial adviser before you accept the terms of your buyout so you can be ready to mitigate taxes as needed.
  5. Pension choices. If you have a pension through your company, you’ll have several choices to make, including whether to take a lump sum that you can roll to a retirement account or when to start taking distributions. You’ll only have one chance to make this decision, and it’s an important one. Your financial adviser can help you determine the best choice for your situation.
  6. 401(k) rollouts. For those with employer-provided 401(k) accounts, we find it’s best to keep your account in place until you have properly evaluated your financial circumstances. If you rolled your 401(k) to an IRA and then found you needed an early withdrawal, you could face penalties that would not affect you if you took early retirement or a draw from your 401(k).
  7. The fine print. Look for any restrictions on your ability to work in a similar capacity elsewhere. You may wish to consult with an employment attorney if your buyout contains a noncompete clause or anything else that could hinder your ability to resume your career at another company.
  8. Negotiating. Your employer may or may not be willing or able to negotiate some of the terms of your buyout, such as a non-compete clause or some company benefits, however many buyout offers involve set retirement “windows” that cannot be negotiated. Still, it doesn’t hurt to ask.

Taking a buyout can have a major impact on your financial plan, particularly if you are no longer able to contribute to your 401(k) or IRA. Your financial adviser can help you revise your plan, if needed, and can help you determine what to do with any lump sums you may receive. At AMDG Financial, we welcome the opportunity to help clients and their families evaluate the pros and cons of buyout offers and make any necessary decisions with confidence. If we can be of assistance, please feel free to contact us anytime.

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