Don't simply take money and run when buyout comes

PERSONAL FINANCE

April 09, 2006|By EILEEN AMBROSE | EILEEN AMBROSE,SUN COLUMNIST

One of the toughest decisions faced by thousands of workers each year is whether to accept an employer's buyout offer.

Is a lump sum of cash, perhaps amounting to tens of thousands of dollars, worth giving up a regular paycheck and company benefits?

Will workers lose their job anyway if they don't take a buyout?

Or will the company come back with an even sweeter package if they hold out?

Companies sometimes offer buyouts after mergers to get rid of duplicate positions. But these enticements to leave the job often come from businesses financially ailing and looking to cut costs. That's the case with General Motors, which is offering buyouts to all of its 113,000 hourly workers.

A buyout might be a welcome opportunity for younger workers wanting to switch jobs or older employees on the cusp of retirement. But all others, financial planners say, need to look beyond the cash on the table. They must take into account their age, finances, skills, the job market, insurance and family needs to know whether they would be better off staying or leaving.

"Realize what you are giving up," said Doug Robinson, a financial planner in Bel Air.

Three years ago, more than 900 Bethlehem Steel workers at the Sparrows Point plant took buyouts, and the results are mixed, said John Hough, vice president of United Steelworkers of America Local 9477.

Many retired, using the $50,000 in severance to further feather their nest eggs, Hough said. Some took advantage of free job training to launch careers in fields they had long been interested in. But others weren't prepared when their health insurance benefits ran out, and in some cases they took jobs paying less than those they gave up, he said.

Here are issues to weigh:

"If you take a buyout, are you going to look for another job or not? That's the first decision," Robinson said.

Those seeking another position will have to consider the health of the job market. If your industry is in a slump, it might take months to find another position, and that lump sum of cash might be quickly depleted.

You might have to relocate to find a job in your field, so consider the costs of pulling up stakes to settle in a new place. Or, if moving is out of the question, consider whether your skills can be transferred to another field that needs workers.

Also, older workers aren't supposed to be discriminated against, but it happens.

It can take an older worker more time to find another job, or he might not find one that pays as well as the job he gave up, experts warned.

Next, consider the impact on retirement accounts. Older workers poised to retire might see little or no effect on their traditional pension by taking a buyout, Robinson said. But he recommends that mid-career workers consider long and hard before leaving an employer that has a traditional pension. "Pensions are so few and far between now," he said. "When you have a pension, you get a significant amount of money when you retire. That's less money you have to save via a 401(k). Pension plans are huge."

And if you do go to another job without a traditional pension, your new salary will have to be significantly higher to recoup the pension money you're leaving behind, Robinson added.

But, as many workers have seen, pension promises can be broken. An employer might freeze a pension so current workers can't earn more benefits. There's also the risk that a failing company could end up in bankruptcy and its pension taken over by the government. "You have to have an idea internally what's happening to the future of your benefits, not just what they are currently," said Peg Downey, a Silver Spring financial planner.

Don't forget employer matches to a 401(k). A new employer might not be as generous.

Many times, workers figure they can start tapping retirement accounts if they need money after a buyout. While it's possible under certain circumstances to take money out of 401(k)s and traditional individual retirement accounts before age 59 1/2 without penalty, you'll owe income tax on the withdrawals.

"The last thing you want to be doing is tapping your retirement benefits early," Downey added. It's hard enough for workers to save for retirement, let alone begin to drain accounts prematurely and risk running out of money.

Health insurance is a major factor in deciding whether to take a buyout. Medicare doesn't kick in until age 65. Until then, workers must consider what they'll do for health coverage if the buyout doesn't include insurance.

Workers generally can continue a private employer's coverage for up to 18 months after leaving the job, but they pick up the employer's share of the premiums.

Some workers can be added to a mate's workplace plan. Healthy workers close to retirement might consider a high-deductible insurance policy to carry them until they're eligible for Medicare, Robinson said. On the other hand, workers with health conditions might find it difficult or cost-prohibitive to get insurance on their own.

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