Buyout Bingo
Recently, two big companies asked swaths of their employees to raise their hands and walk out the door. Microsoft and Skydance (the parent of CBS News, where I am a contributor) offered voluntary buyouts to thin the ranks of their staff. From the employers’ point of view, these offers can be a means to nudge marginally attached employees to step away, perhaps in advance of broader layoffs.
If you are offered a buyout, how do you evaluate whether or not to jump ship? For someone who was planning to retire in a couple of years, a buyout can be a gift. For mid-career workers with a mortgage, kids in school and few prospects, it can be a trap. The decision requires an honest appraisal of your financial and emotional situation. Here is a series of questions to consider.
Do You Like What You Do? If yes, then no matter how good the offer is, you may want to stay put. If you are unhappy, then ask yourself whether it is the job itself, which may be a sign of burnout; the company, which has changed direction; or the industry as a whole. If the industry is going through consolidation, it can be appealing to take a buyout before the inevitable round of layoffs hits. Layoff packages are usually less generous than those offered through voluntary buyouts.
How Much Cash Do You Need? If you haven’t done so, now is the time to determine how much money you spend monthly. Then see how long the buyout/severance will last. Presume that it will take you about six months to land a new job, a little longer if you are older, a little shorter if you are younger. If you have an emergency reserve fund, you may need to tap it. Remember, that’s what it’s there for: this is your rainy day! Also, check with your state’s unemployment office to see whether taking a voluntary buyout could disqualify you from collecting unemployment benefits.
How Will You Replace Your Employer’s Health Insurance? Some buyouts include subsidized coverage, but many do not. For two-income households, you may be able to hop onto your spouse’s coverage, but for everyone else, there are two main options: extending your existing health insurance for up to 18 months via COBRA or opting for coverage through the Affordable Care Act marketplace. Either of these options will likely mean higher health care costs until you can replace it with either another employer’s plan or Medicare.
Will the Buyout Get You to Retirement? Buyouts are often juiciest for those who have been at the company for a long time. But many of those in their fifties worry that they can’t tap their retirement accounts until they turn 59½. Enter, the “Rule of 55,” which states that if you turn 55 or older during the calendar year you lose or leave your job, you can begin taking distributions from that employer’s 401(k) without paying the 10 percent early withdrawal penalty. (You are still on the hook for taxes on your withdrawals from a traditional account.) To take advantage of the rule, don’t be so quick to roll over the 401(k) into an IRA, because it does not apply to IRAs.
Are You Leaving Anything on the Table? Unvested stock and restricted stock units, an upcoming bonus, a pension that’s about to bump up with another year of service, or a 401(k) match that hasn’t vested could all be forfeited. Some of these may be negotiable, so ask.
If you decide to take a buyout, a couple of recommendations:
Consider Taxes. A lump-sum payment is taxed as ordinary income, and the amount withheld may not cover your full bill, so set some cash aside to pay Uncle Sam and your state, next April. If your separation straddles year-end, ask whether part of the payment can be pushed into January to spread out the tax burden.
Pay for Help. Have an attorney review the agreement, especially any non-compete or release language, and run the numbers with a fee-only financial planner. Buyout windows can be short, so get these appointments on the calendar now.