When to Accept a Buyout

It's official. More than 47,000 auto workers will hit the road by the end of the year, having decided to accept GM's generous early-retirement offer. The buyout, designed to cut labor costs, may be good for GM -- but is it good for America? What woul

While some companies are freezing their pension plans, others, like General Motors, are using early-retirement incentives as a way to trim their workforce and cut costs. In late June, GM announced that more than 35,000 of its hourly workers, plus about half of the 24,000 employees at Delphi Corporation, its largest parts supplier and former subsidiary, accepted early-retirement packages.

The GM buyout is one of the largest of its kind, but it certainly isn't the first -- nor will it be the last. Chocolate-maker Hershey and credit-card company MBNA eliminated hundreds of jobs over the past year through voluntary severance and early-retirement offers. What would you do if you were offered the choice -- take the sweet deal or bet your future on the hope that your company will survive?

A lot depends on how close you are to retirement, says Mark Cortazzo, a financial planner and senior partner with Macro Consulting Group in Parsippany, N.J., who has evaluated scores of buyout proposals for clients who worked for major telecommunications and pharmaceutical companies.

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If you are planning to retire in a few years and your company offers you a two-year severance package, it's a pretty easy decision, says Cortazzo. "You can stay home and get paid as much as you would if you had kept on working." Or, he adds, if you are afraid of getting bored, you could pick up a part-time job doing something you really enjoy, and every penny you earned would be gravy on top of your severance package.

But if you are still four, five, or more years away from retirement, it can be a tougher decision. While you may want to continue working in your current position, what are the chances that your job will be there in a few years? If the company's future is questionable, it might be better to take the buyout offer and start looking elsewhere. That's what apparently happened at GM and Delphi, where the number of employees accepting buyout offers was much larger than expected. Ironically, the additional savings could help GM regain profitability and Delphi emerge from bankruptcy.

Valuable benefits

One factor that can make or break your decision to accept a buyout is whether it includes retiree health benefits, says George Papadopoulos, a CPA and financial planner in Novi, Michigan. "Retiree health benefits are critical to retirement security," says Papadopoulos. A recent study by Fidelity Investments estimates that a 65-year-old couple retiring today without employer-provided health benefits would need a nest egg of $200,000 just to finance out-of-pocket medical costs, such as Medicare premiums, co-payments and Medigap expenses. And that eye-popping estimate does not include long-term-care costs.

GM and Delphi offered workers with at least 26 years of experience full retirement benefits and payouts of up to $35,000. Younger workers will receive either $70,000 or $140,000, depending on experience, but will give up all benefits other than their pensions.

Another major consideration is whether to elect a lump sum or a traditional pension for the rest of your life. And if you choose the pension, do you take a larger amount with no survivor benefits, or a smaller amount during your lifetime with continuing benefits, usually at a reduced level, to your surviving spouse?

The easiest way to figure out whether a lump sum or a traditional pension is the better deal is to compare how big your monthly payment would be if you used the lump sum to buy an immediate annuity from an insurance company. You can compare prices at Web sites such as www.annuityshopper.com.For example, a 65-year-old man who bought an immediate annuity for $100,000 would be guaranteed about $710 a month for the rest of his life, no matter how long he lived. But a 65-year-old woman could expect to receive only about $640 a month from the same $100,000 investment, because women, on average, live longer than men. If the pension offer is larger than the estimated annuity payment, consider taking the pension.

Investing a lump sum for the rest of your life can be challenging in the current economic environment. Although interest rates are rising, they are still low by historic standards. The lower the interest rate, the smaller the annuity payout. And stock market performance has been less than stellar. One option is to take the lump sum and park it in a money-market fund currently paying more than 4% until better investment opportunities come along. Or you could wait a few years to buy an annuity. Payouts will be larger based on your age, and they might also get a boost from higher interest rates.

There's one final consideration: the emotional impact of leaving your job. "The decision is rarely just about money," says Cortazzo, who notes that many workers with long tenures don't want to leave a job they love or are afraid to try something new. "The unknown is scary, but I don't have a button on my calculator for that."

Mary Beth Franklin
Former Senior Editor, Kiplinger's Personal Finance