Categorized | Advice

Buyout Agreements and Early Retirement

Posted on 09 March 2011

Think carefully before accepting a buyout offer.

During the past two decades, prominent U.S. companies offered early retirement buyouts to reduce senior staff and avert negative effects of corporate layoffs. Buyouts are a humane approach to staff cuts during economic downturns or internal/external changes, including mergers, plant closings and business practice revisions.

Buyouts are mutually beneficial arrangements, with specific terms that can vary widely. Terms are usually consistent with precedent, the company’s corporate culture, and the employee’s level and years of service. A typical package includes:

  • Cash payment
  • Benefits (e.g., health insurance and access to pension benefits)
  • Severance bonus
  • Outplacement services

If you receive an offer to exit early, take time to understand the terms, options, and conditions. Companies usually give employees several weeks, even months, to decide. During this time, seek assistance from the following:

  • Your corporate benefits manager
  • An attorney (to review the agreement)
  • A financial planner (to help assess your long and short-term needs)
  • A career transition consultant (to clarify re-employment issues)

Leaving a company after a decade or more can cause emotional pain, especially for a loyal, dedicated individual.

Read the Fine Print
With personal issues, career goals and finances in mind, consider these questions:

Is the buyout optional?

Your company may or may not want you to accept the package. Consider whether you have a future with the company if you decide to stay. Determine if the buyout is widespread or isolated. An executive recently offered a buyout reported that when she discussed it with a senior executive, he said it was not intended for her, stating, “We hope you’ll stay.” Despite this tip-off, the offer was too good to refuse. She left and quickly accepted a new position in a related industry.

Can you sever close personal and professional ties? Leaving a company after a decade or more can cause emotional pain, especially for a loyal, dedicated individual who is highly invested in the organization. Will you be able to move on gracefully?

What are the risks if you turn down the buyout and remain? Do some research to help determine if the company is in a temporary or long-lasting slump. This will help you predict whether or not the company will be able to offer the same package later on.

Are you ready to retire? Buyouts are usually offered to an age group that is considering retirement. Some have been burned out by work demands and are eager to pursue their interests. Others, regardless of age, cannot imagine a fulfilling life without work. According to a recent study at Rutgers University, 42 percent of newly retired individuals, particularly those in their late 40s and 50s, returned to work. Think how you will handle absence of work, with its social and personal benefits.

How marketable are you? Your age plays a role in assessing your marketability. Career transition consultants agree that job hunting after 50, with several years of work experience in one company, is often challenging. Yet, during the recent economic boom, professionals with valued work experience in key functions and industries easily found work as temporary executives and consultants. If you are worried about finding new employment, discuss your circumstances with employment professionals.

What limitations will be placed on your future employment? Federal employees are required to pay back the full amount of their buyout if they later accept new employment with the federal government. Other employers enforce a non-compete clause that might restrict your options for up to two years after departure.

Can you financially afford to retire or take time off to reposition your career? Your financial commitments may be too strenuous to survive on your severance package or cover your retirement objectives. Remember that severance pay is taxable income. Financial planners advise you to examine your:

  • Secure income
  • Investment income
  • Retirement expenses
  • Retirement penalties
  • Health insurance costs

You should also understand tax obligations related to your separation payments. Factor in “big ticket” plans, such as college tuitions and wedding costs. It is not uncommon for employees to inaccurately gauge the package’s long-term worth when looking at a large, lump sum of money.

Signing on the Dotted Line
Accepting a buyout is complicated by “what if” scenarios. Survivors will tell you this decision impacts every aspect of life. For this reason, you will vacillate between euphoria and despair while trying to decide. Accordingly, take time to consider the offer, analyze your personal circumstances, and then make your decision without looking back.

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