Weighing Whether to Take a Buyout

By R.P. Whittington

These days, most companies don’t think twice about letting staff go when it comes to staying competitive, keeping their stockholders happy, or both.

But instead of mass layoffs and downsizing, many choose instead to offer employees buy-out packages.

In March, General Motors made headlines when it offered buyout packages to 125,000 union workers – the largest offer of its kind ever in U.S. history.

So how do you know when I buyout is a good deal?

Fran Benish, an employee with Johnson & Johnson, was offered buyouts twice before settling on retirement when she was 54 after 19 years with the company. She says she was fortunate to have a financial advisor to help her with the decision.

"I had to know that retirement would be a good option for me to pursue at that time and that I actually had the money I needed to retire comfortably," she said.

When Benish and her husband moved from Reed, New Jersey to St. Augustine, Florida a few years before, they decided that they wanted a financial advisor to help them plan for the future – turning to Dan Ciez, a senior financial advisor in the Jacksonville Office of Waddell & Reed Financial Services. Ciez began his investment career in 1993.

"The typical approach is to look at all the individual’s assets and develop two or three scenarios, each based on the investment needs and risk-tolerance of the individual and their personal desires," Ciez said. "Do they want to fully retire or do they want to travel more and work part time? Do they want to use some of their assets to support them while they change careers? There’s a lot to consider."

Once that’s decided, he says the next step is figuring out your annual living expenses then looking at the income side. Early retirement income includes the buyout package itself, severance payments and benefits, along with future Social Security benefits you will receive, personal savings and investments. If you expect to continue working, estimate that income as well.

If you are five or more years away from retirement, the decision is tougher. Mid-career workers might want to check out other job prospects before agreeing to an early-retirement buyout.

According to Stan Haithcock, president and managing director for Strategic, a Jacksonville-based company that specializes in fixed annuities and life insurance, having an independent third-party look over your buy-out option is important.

Financial advisors are compensated for their expertise and work in different ways. Some advisors charge a fee for a personalized financial plan, some take a commission-based approach to their compensation through the sale of investments, while others are paid through fees based on a percentage of assets.

When considering a buyout, Haithcock says your first step should be contacting your company’s human resources department.

"The human resources director is the liaison between the employer and the company that manages your retirement funds," Haithcock said. "While in some cases, where you are being forced out, it might be tough to do, you need to grin and bear it, walk into the h.r. department and ask for help. In some cases, the money managers may have other exit strategies for you to consider."

Another consideration is the economic environment and where your employer might be down the road. Typically, the first buyout offer is the best, and although you may want to stay in your current position, the company may be facing market pressure to cut costs further in the future. In that case, it might be better to take the buyout and start looking elsewhere for more stable employment.

Ciez says that while every buyout case is different, people need to look at the financial and non-financial elements of the package.

"One of the biggest issues is health insurance, and whether the buyout package includes some extension of coverage," Ciez said. "If you’re married and your spouse is still working, can you get on their health insurance policy? If not, you’ll need to shop around and factor that into your expenses."

Ciez notes that, beyond the financial implications of taking a buyout, people have to contend with the more emotional aspects of leaving a job.

"It can be a very difficult decision to make, especially if you’ve devoted many years of your life to an employer and you love what you do," he said. "And the unknown can be intimidating. I can guide clients through the financial implications of taking a buyout, but each has to deal with the emotional part of it as well."

For more information about choosing a financial planner, visit the Financial Planning Association at www.fpanet.org. Dan Ciez can be reached at the Jacksonville office of Waddell & Reed at 904-448-2743. Stan Haithcock at Strategic can be reached at 904-371-1940.(Investors should consider investment objectives, risks, charges and expenses carefully before investing. Past performance is no guarantee of future results. Insurance products are available through arrangements with insurance companies.)

Media Contact: Ron Whittington (904-563-0402)