As I update this post for the COVID-19 pandemic, that offer may be delayed until later in the year due the to CARES act. For some of you, the Payroll Protection Program may delay any buyout or layoff package. For others, there will be industry initiatives like the one for the aviation industry.
If this is a layoff you will probably have to take the offer but that is still negotiable.
If this is a buyout, how do you determine whether to take it or not?
The original idea for this post came from a New York Times article, Making Money Decisions When You Lose Your Job. I have also had multiple clients who were offered a buyout package or severance. You will find references to them in my post, 4 Signs That You Are Working for a Failing Company. Rather interesting—I reposted that same material on LinkedIn Pulse and it went viral. Check out the comments.
I then recorded a podcast with Roger Whitney, the Retirement Answer Man, on this topic.
Note: This post was originally published in May of 2015, updated in April of 2018 and updated again in June of 2020.
Evaluating the Buyout Package
You need to consider the following:
- Immediate financial needs
- Tax implications
- Health insurance
- Provisions of the separation, including ‘non-compete’ clauses
- Long-term financial needs
- Mental health and well-being
- Future Job Prospects
Immediate Financial Needs of the Buyout Package
How are you going to make ends meet financially?
- Check out unemployment benefits with particular attention to the Payroll Protection Program.
- Consult your financial adviser immediately. If you do not have a financial advisor, I highly recommend you listen to the Friends Talk Money podcast episode called Managing Money in a New COVID-19 Economy. Richard Eisenberg, Terry Savage, and Pam Krueger mention multiple organizations that are offering free financial services.
- Perform a careful budget analysis. How much money do you actually need to live? Be honest with yourself on what is a need versus a want.
If you plan to return to work, a good rule of thumb is to allow a minimum of one month of unemployment for every $10,000 of annual income. If you are making $100,000 annually, you can expect your job search to take 10 months.
As I update this post in June of 2020, the economy went from humming right along – but with a lot of age discrimination – to a total collapse in just a few months. I would plan on it taking longer than you think it will take to get back to full employment.
For a deep perspective on this topic read my post, How Long Will My Job Search Take?
If you get a lump sum severance in the second half of the year AND you get 6 months or more of severance, you may move into a higher tax bracket…especially if you find work quickly.
I had one client get contract work within 6 weeks of being laid off. This was in the September/October time frame. He told his new employer to withhold payment until the following year. This helped him in two ways:
- He did not need the money now, and the extra money would’ve pushed him into a higher tax bracket
- He would receive a lump sum check in January, which was an emotional relief
If it is late in the year, you may be able to negotiate to delay receiving your severance until the following year. Larger multinational companies may not do this, but smaller companies will likely negotiate.
The CARES act allows you to withdraw up to $100,000 from your retirement plan prior to 59 1/2 penalty-free. However, you will have to pay income tax on that amount.
Please, please, please get some financial advice before withdrawing any money from your retirement plan. Read the Washington Post article Millions of baby boomers are getting caught in the country’s broken retirement system and pay particular attention to the plight of Gregory Bates.
When I originally wrote this post back in 2015, I was encouraged by the availability of individual health insurance made available by the Affordable Care Act (ACA). Well, that has exploded, especially if you are over the age of 60.
Are you eligible for COBRA? Will they offer you group health insurance via their retirement program?
No matter what, group health insurance via your employer is EXPENSIVE! It is good insurance, probably a PPO plan, but you will pay for it.
You paid for it indirectly via lower wages and your employer purchased it. Check last year’s W-2 statement. It clearly states what your employer spent on your health insurance. When you continue your company health insurance via COBRA, it will be pricey.
Now go to either your state health insurance exchange or the federal exchange to check out if you are eligible for a special enrollment period and the prices.
How do these compare to the COBRA options?
Are you eligible for Medicare? That is another maze that you will have to traverse.
Roger Whitney recorded a couple of excellent podcasts on healthcare before Medicare:
- #211 – Healthcare Before Medicare: My Wife Quit Her Job!
- #212 – Healthcare Before Medicare: ACA and COBRA
Our options have decreased considerably since I originally wrote this post back in 2015.
Provisions of the Separation, Including Non-Compete Clauses
Read through the separation agreement. I suggest you take it to your lawyer. The expense of taking this to a good employer is well worth it. The separation agreement is negotiable and is not set in stone no matter what your employer says.
Do you have your original signing papers? For those of you who worked for many years at the company that you are separating from, the answer is probably no. You might ask for your personnel jacket from the company to see what they do have.
If you do have your original signing papers, take that with you when you speak with a lawyer.
If you have a non-compete clause in your contract and you live in a right-to-work state like Texas, that non-compete is likely not enforceable. I cannot emphasize enough that consulting with an employment lawyer is money well spent.
Long-term financial needs
Review your retirement accounts with your financial adviser. When I left my last company, I was completely stressed out. My blood pressure was very high and I was becoming physically ill from working there. I had to get out.
I went to my financial adviser and asked, “Can I retire? Can I retire now?
After running numerous Monte Carlo simulations, the answer was yes. I had no plans to retire and had already started Career Pivot legally, but it gave me peace of mind to know that I would be okay.
I have had multiple clients who have been offered both voluntary and involuntary packages. They need to talk to their financial advisers.
I have also had clients who are extremely distrustful of the finance industry. I am a big fan of the Allworth Financial Money Matters podcast. They have an excellent article on their website called How to Select a Financial Advisor Guide.
Mental Health and Well-Being
Your mental health and well-being are critical in evaluating a buyout package. One of the key factors to consider is that you will likely not have a paycheck. No matter how well prepared you are, emotionally giving up the paycheck is really difficult.
When I gave up the paycheck, I still woke up at 4 in the morning in a cold sweat saying to myself,
“I do not have a paycheck!!”
Do not underestimate the emotions that will surface. Find someone—a spouse, friend, counselor, clergy, social worker, etc.—to help you work through these emotions.
For a deep perspective on this topic read my post Demise of the Paycheck – Good Riddance.
Be Prepared for the Long Haul
The COVID-19 pandemic will extremely disruptive. So many industries and careers will disappear forever. I chronicled earlier what the COVID-19 pandemic is doing to the aviation industry.
We will not know the extent of the devastation and disruption for a while. You should be acting in the short term but preparing for the long term. Many of us will be working into our 70s and beyond. That takes planning.
When a buyout package is offered, evaluate it using expert advice. You may be tempted to wait for the next round.
When a buyout package is offered, the next round is almost never more lucrative.
Have you been offered a buyout package? Tell us about your experiences!