Make the Most of a Buyout Offer
Kiplinger's Personal Finance|November 2020
Make the Most of a Buyout Offer
Handled wisely, your buyout could help you build a bridge to retirement without jeopardizing your financial security.

RECEIVING A BUYOUT OFFER IS CERTAINLY preferable to having a security guard escort you to the parking lot, but it can still be disconcerting—especially now. Many employees of airlines and other businesses decimated by the coronavirus pandemic may feel that they have no choice but to accept the offer because the next notice from human resources will probably have layoffs in the subject line.

Before you make any decisions, conduct a thorough analysis of your net worth—everything you own, everything you owe and all of your sources of income. Then do an inventory of how much you spend, says Thomas McCarthy, a certified financial planner in Marysville, Ohio. And don’t just jot down items that pop into your head. “We spend money on a lot of things we just don’t track,” McCarthy says. When people use bank expense-tracking apps or other tools to monitor all of their spendings, “it’s usually an eye-opener,” he says.

Whether you have a choice about taking a buyout or not, consider what will happen to your health insurance (see page 56). Still working but expecting a buyout offer? Schedule elective surgery, dental appointments, and other procedures covered by your employer’s health insurance to take advantage of that coverage while you can. Although some employers continue health insurance as part of the buyout package, such offers are increasingly rare.

Lump-Sum Versus Traditional Pension If your employer has a pension plan, one of the most difficult decisions you may face—in large part because it’s usually irrevocable—is whether to accept your retirement benefits as a lump sum or as a traditional pension with monthly payouts. Your choice should be based on a number of personal factors.

Marital status. If you’re married and choose to take a pension with a joint-and-survivor payout, payments will continue for as long as one spouse is alive. This is a valuable benefit you shouldn’t overlook, financial planners say. Even if you don’t expect to live well into your nineties, your spouse might. Taking a traditional pension will guarantee that he or she won’t run out of money.

Your employer’s financial health. Many workers opt for a lump sum because they’re afraid their employer will go down the tubes and take their pension with it. But you do have some protections. The Pension Benefit Guaranty Corp. guarantees your pension in the event your employer files for bankruptcy, but only up to a specific amount that’s adjusted every year. In 2020, the maximum guarantee for a 62-year-old with a single-life annuity is $55,104 a year; it’s $49,596 for a joint-and-survivor annuity.

Before making a decision, ask your employer to provide you with a report showing the funding level of its pension, McCarthy says. The company is legally required to provide that information. If the report shows that the company’s pension obligations are funded close to 100%, you should feel comfortable choosing that option if it’s right for you, he says.

Other sources of income. Not everyone needs a guaranteed stream of income. Barbara Ristow, a CFP with Buckingham Strategic Wealth, in Fairfax, Va., says she recently advised a client whose wife was several years younger, still working and eligible for her own pension. Because the couple could count on her income, they decided to take the lump sum and invest it, allowing the money to continue to grow until they need it.


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November 2020