When is a company buyout right for you?

Written by: Samantha Winogrond, CPA

Topics: Financial Planning

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 A buyout offer is a financial incentive presented to employees to encourage their exit from the company. This generally happens when an organization is seeking to downsize. Although buyout offers can cover employees at all levels, they are often structured as early retirement packages geared toward experienced workers.

In the past year, a local Annapolis company was purchased by another and underwent a workforce restructuring. As a result, the company eliminated many positions presented buyout offers to employees. We were lucky enough to work with some of these employees to help determine if they should accept the buyout offer.

Although the idea of losing your job is generally stressful, a generous buyout offer may be a great opportunity for you! If you are looking to change jobs, a buyout offer could serve as bonus and provide you with a financial cushion until you find your next position. If you are considering retirement, this may be a great opportunity to make the leap with a little extra cash in your pocket. Starting your own business, taking time off, changing careers, and going part-time are all opportunities when deciding if you should accept or reject a buyout offer.

In analyzing whether to take the buyout you should consider the following:

  • Your current financial situation.
  • What are your health insurance options?
  • Will you need to purchase life insurance?
  • How valuable are the incentives being offered?
  • Should you take an annuity or lump sum payment?
  • What should you do with your company retirement plan?

Financial Situation

Having a solid understanding of your financial situation is the first step in determining whether you should accept or reject the buyout offer. Being aware of where you stand financially and how prepared you are to achieve your goals, will help you determine if the buyout offer will provide you with the added resources necessary to reach your goals. 

Health Insurance Options

If you accept a buyout offer, do you qualify for other insurance opportunities, i.e. your spouse’s workplace insurance, the open healthcare market, Medicare, or will you need Cobra? Cobra gives employees and their families who lose their health benefits the right to choose to continue group health benefits for limited periods of time in certain circumstances such as voluntary or involuntary job loss, reduction in the hours worked, transition between jobs, death, divorce, and other life events. Qualified individuals may be required to pay the entire premium for coverage up to 102 percent of the cost to the plan.

Life Insurance and Changing Jobs

Will you be able to take your life insurance policy with you or is it a group policy you’ll have to leave behind? Because insurance companies want to keep their customers, many offer transferable plans. With a transferable plan, when you leave a company that offers term life insurance, you may have the option of converting to a permanent or cash-value policy.

If you are young and healthy, this option may not be necessary to secure life insurance because you may be able to obtain it in the open market. However, if you are ill and will have a difficult time securing life insurance, this may be a good option.

Having a solid understanding of your overall financial situation and knowing where you are exposed to risk, will help you determine how much life insurance, if any, you actually require. Once you determine how much insurance you need, you can then make a decision if you need to move forward.

Annuity or Lump Sum

When presented with a buyout offer, you may have to determine whether to take a lump-sum payout or an annuity. A lump-sum payout is when your employer provides you with a one-time payment. In exchange, you agree you will give up the monthly payment option. Alternatively, an annuity is a regular monthly payment option that lasts for the remainder of your life.

Making the right choice will require diving in to your personal financial situation and determining the pros and cons of each situation. An annuity provides certainty of income. You will know exactly how much income you will receive each month. You can have peace of mind of knowing that you will have a guaranteed amount of income, even if you live a very long time, and even if the markets go into a deep downturn. However, you also need to consider about how stable the financials of the company are; can you rely on them to continue to pay your annuity?

If you take the annuity option, you will also want to make sure that you have other sources of income in case you encounter any financial hardships. For example, if you incur a large medical expense, you will want to make sure that you can dip into other accounts for the cash.

Also note if you pass away, your spouse may receive much less of the annuity or nothing at all. When you are married, your annuity income is typically not just for you, but also for your spouse who may live many years after you are gone. If you are in poor health, or believe that you may not have a long life span, you may be able to secure more income via the lump sum option.

The main attraction for many with the lump sum option is the ability to have more control over the money. This provides the freedom to determine how much income to pull annually, as you are not limited to a fixed annuity payment. You also are able to determine how to invest the funds. Keep in mind that investing opens you up to investment risk. If you invest too conservatively you may not earn the returns needed to support the level of spending you would like and if you take too much risk, your lump sum may take a big hit during a severe market dip, which could result in you running out of money.

Determining whether to take an annuity or lump sum payment is not an easy decision. At JSK financial we are here to objectively provide you with the information that you need to make an informed decision that is best for your unique financial situation and post-buyout goals.

Retirement Plan

Option 1: Leave the funds where they are. You can simply leave the funds in your old employer’s 401(k) plan where they will continue to grow tax deferred. Leaving your money in your old employer’s 401(k) plan may be a good idea if you are happy with the investment alternatives offered, but keep in mind the plan fees may be even more expensive for a non-current employee.

Options 2: Transfer the funds directly to an IRA (a direct rollover). You can also roll over your funds to a traditional IRA. There is no dollar limit on how much 401(k) money you can transfer to an IRA. A traditional IRA can offer almost unlimited investment options; a 401(k) plan limits you to the investment options offered by the plan. 

Great Terms and Incentives

Every buyout offer is different. Buyout offers may include incentives such as extended medical coverage, years of service added to a pension calculation, and additional severance pay over and above what an employee would have been entitled to based upon their years of services. You may also be offered training and job search help. In many cases, buyout offers are great incentives for older workers to take early retirement, start new careers, and take time off.

Buyout offers can have major financial implications. As a result, if you are presented with a buyout offer you should consider the long-term consequences in addition to the short-term impact of accepting or rejecting the offer.

Your situtation is unique. Let's take a look.

 

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