Q-and-A With Bob Skladany: Buyouts and Early Retirement
By: Bob Skladany | Source: AARP.org | February 9, 2009
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Q: I’m 53 and have been with my employer for 24 years, and I really enjoy my work and colleagues. The economy has really hurt our sales, and work in our plant is way down. I’ve had a good work history, solid performance ratings, and decent raises until the past two or three years. After weeks of rumors about layoffs, almost everyone was offered what management has called a “buyout offer.” The company has said that if not enough people take the buyout, it may be necessary to have further layoffs that may not include any incentives.
I have been offered one week of severance for every year of services, or 24 weeks of pay, plus six weeks of accrued vacation. I will also continue on the employer health plan at employee rates for the same period and can then extend coverage through COBRA. My life insurance and disability insurance will end immediately. We have no pension plan, but I have a good amount saved in my 401(k). They have offered outplacement courses to help with a résumé and my job search. This buyout sounds pretty good, but I’d be giving up a lot; and I’m not sure how easy it will be to find a comparable job with the economy in the dumps. I have a few weeks to decide, and I simply don’t know what to do. What do you advise I do? –Mel, Houston
A: Mel, this is a difficult decision. At 53, you have at least 10 to 15, or maybe more, years ahead of you to work. Don’t think about the terms of the buyout. Instead, ask yourself these questions:
- How financially secure is your industry and your employer?
- Do you enjoy your work, or could you see yourself prospering elsewhere?
- Do you want to finish your career with your current employer?
- What is your family’s financial situation, and what are your likely obligations?
- How’s your health?
- Would you be able to return to train for a new career?
These are important decisions. Right now, you still have considerable flexibility that you may not have in three to five years.
Another concern is this: How confident are you that if you decline the buyout, that you would not be selected for an involuntary layoff if business gets even worse? Talk to supervisors and managers who will give you honest and candid feedback. Would you be rated in the top 50 percent of employees? Say what they will, employers tend to lay off the employees they consider to be the least productive. Also, be aware that there is an increasing tendency to retain the most experienced and capable workers. Workers age 55+ have a lower unemployment rate than younger workers.
If you decide that you want to stay with your employer, and there’s a good chance you would not be chosen for layoff, the decision is made, and the details of the buyout are unimportant. Decline the offer and continue to give your all at work.
The decision to accept the buyout is no less difficult. The basic question is whether or not you can secure a rewarding and meaningful job in your community or elsewhere if you choose to relocate. You must quickly go out and “test the waters” for suitable work. Can you find a job in which you can spend 10 to 15 years? How long might it take to find a new job? What pay level and type of health and retirement savings benefits can you expect?
Your buyout offer is pretty reasonable. One week for every year of service is something of a norm, though some employers offer far less. Between accrued vacation and severance pay, you will have 30 weeks of income. If you have not found work by the end of the 30 weeks, you are eligible for unemployment insurance compensation. You should be fairly certain that you can secure your new job before your severance ends. If not, you’re probably looking at an income decline while on unemployment compensation and a big increase in COBRA health-benefit premiums, up to as much as $1,200 or more for comprehensive family coverage.
That’s a great deal to consider and as many uncertainties. Take your time. Discuss the decisions with family, friends, and coworkers. Talk to recruiters and even try to meet with prospective employers. Ask if you can meet with the outplacement professionals before you have to decide.
Based on just the information you’ve provided, I am inclined to suggest you decline the buyout offer if you believe it is unlikely you will be laid off in the future and your prospects for other work are not good. Finding comparable employment in today’s economy is a high-risk proposition. The 30 weeks’ pay sounds attractive, but that time can fly by and leave you in a very bad financial state. This is a time to minimize your risks.
Q: I never thought I would have to deal with the decision my employer of 37 years asked me to make. I’m 61 and have worked with the same employer since age 24. This is the only job I know, and my coworkers are family to me. I do have a pension, which my employer will “sweeten” by adding four years to my length of service, so my pension would be at the level as if I retired at age 65. I don’t want to start my Social Security until I’m at least 66 and would prefer to wait until 70 and receive an even bigger monthly payment.
I’m not covered by employer-provided retiree health care, so I would have to pay COBRA rates until I’m 65, when I would begin Medicare. I’m in generally good health and enjoy my work, though I must admit that I’m sometimes tempted to try something new as the last chapter in my working life. I don’t know which way to turn. How should I go about deciding? –Mary-Jane, Columbus, Ohio
A: I believe you have two fairly good choices: You can decline the offer and continue working until age 65 or so, when you are covered by Medicare. You will have four more years of income, and you could delay receiving Social Security at a reduced rate. Your full Social Security would begin at age 66. You would receive your full, age-65 employer pension. Also, you would continue to be covered by your employer’s health benefits. If you feel your job and employer are secure, and you are content in your job, I suggest you stay on.
There are pluses and minuses to accepting the early-retirement package. The first negative is that following your 18-months of COBRA health coverage, you are on your own for coverage until age 65. This will be at least two or more years, costing about $5,000 to $7,000 annually for individual coverage, and double that for two people. And don’t underestimate the shock of leaving your employer and coworkers of 37 years. Your workplace and colleagues are an important part of your well-being—physical and emotional. How big a loss would this be for you?
On the positive side, you will collect pension benefits for four or more years than if you had waited to retire. If money is a concern, you can find a meaningful “retirement job” to supplement your pension, and it may provide employer-sponsored health benefits. Some age-friendly employers offer comprehensive and affordable health benefits to part-time employees working as few as 24 hours a week.
I don’t believe yours is a financial decision; rather, it’s one of personal preference. How would you most enjoy spending the next four or five years? You are one of the fortunate few with the freedom to choose.
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