Should you grab that buyout package?: Financial News

Consumer Reports
Should you grab that buyout package?
Wednesday October 1, 2008 3:00 am ET

Illustration by Bob Eckstein

Say what you will about American industry. There's at least one product that we churn out with astounding efficiency. I refer, of course, to the severance package. Few men or women I know haven't taken or at least been offered one of them in recent years, including yours truly from a previous employer. For workers within striking distance of retirement (say, age 50 and up), the deal is often presented as an opportunity to retire early and perhaps start a new career elsewhere.

In recent months, early-retirement packages have been offered by employers as diverse as Colgate-Palmolive, General Motors, and The Washington Post. Just in case you find an offer in your In box someday, here are a few things to consider.

TAKE IT OR LEAVE IT

Of course, if the package is being forced on you, you might as well start packing up (although that isn't to say you can't try to negotiate, which we'll get to below). "Some companies offer early-retirement packages to employees whose performance appraisals fall below a certain level," says Bedda D'Angelo, a certified financial planner in Durham, N.C. "They know they're going to be laid off either way."

Having a choice introduces a new set of questions: Do you have the resources to retire now? Could you get another job? Will your employer be around for much longer? If the company is going down in flames anyway, you may as well grab that parachute and bail.

However, if your employer is relatively stable, you should probably stick around. You'll have more time to stow money for retirement and fewer years that your retirement assets alone must support you.

Note that if you do stay on, you may face these decisions all over again. "We find that people who turn down a package may be offered one again in three or four years," says Karen Altfest, a certified financial planner in New York.

PACKAGE DEALS

Now let's suppose you're inclined to take a package. First find out exactly what you are entitled to, which should be available In writing from your employer (or union if you're under a union contract). Next decide what else you want out of the deal. You might not get it, but there's certainly no shame in asking. Here are half a dozen things to consider:

Health coverage. Maintaining health insurance until age 65, when you will be eligible for Medicare, may be your greatest challenge in early retirement. Your employer may be willing to keep you on the company plan until your severance ends or perhaps subsidize your COBRA costs once you're off it. (COBRA, you'll recall, is the law that allows some people who have lost jobs to stay on an ex-employer's group plan, typically for 18 months, if they pay 102 percent of the employer's cost.) For more about COBRA, go to the Department of Labor's Web site, at www.dol.gov/ebsa.

Pension perks. If you have a defined-benefit pension plan (one that generally pays you a set amount periodically), your benefit is probably based on some combination of your age, years of service, salary, and another multiplier, such as a percentage. Your employer may be powerless to monkey with that multiplier, but it may be able to credit you with more years of service or even a higher age, according to Morris Armstrong, a certified financial planner in Danbury, Conn.

Severance pay. The employer may have greater flexibility here, especially if you are being offered an individual package that isn't part of a mass downsizing.

Options. If you have stock options that aren't vested yet but will be in the near future, ask your employer if your termination date can be extended until then, Armstrong suggests.

Consulting. If you and your expertise are still valued by your company, ask about coming back on a part-time, freelance basis, says Altfest. Note, however, that this can get a little tricky under the rules of some pension plans if you have already started to receive benefits. So check with the company benefits office or a financial planner. One good source for fee-only planners (they are the kind that receive no commissions from selling products) is the National Association of Personal Financial Advisors, at www.napfa.org.

Noncompete clause. Check your severance contract for one of these little landmines, especially if you want to continue in the same industry. Armstrong says you might be able to get it removed or modified. You should probably talk with an attorney who knows employment law. "Even people with packages worth $100,000 or $200,000 are reluctant to spend $500 to consult an attorney," Armstrong notes, "but sometimes they really should."

If you're over age 50, sometimes you may feel like you're walking around with a "downsize me" sign on your back. But it never hurts to be prepared. "These days, people really should be financially ready to retire between 50 and 55, not 62 and 65," according to D'Angelo.

So now they tell us.