As companies downsize, one way of reducing head counts is the retirement buyout package. These proposals offer financial incentives to encourage longtime employees to retire two to three years before the company's earliest retirement age, usually 55, or a few years before the typical retirement age of 65 or older.
The decision whether to take the offer is not an easy one. Pass it up, and you run the risk of being laid off later--without the sweeteners. Moreover, you'll have 30 to 90 days to give your response. "Assessing these proposals is a complicated and time-consuming process," says Frank Marzano, a certified public accountant and financial adviser with American Express Financial Advisors in Port Washington, N.Y. "A lot of money can be left on the table if the proposal is not properly analyzed."
Indeed, a number of issues must be considered before making the decision. But first you'll need to decide if you want to get another job and what salary you can command. You'll also need to understand how your pension is calculated. One common formula figures your benefit based on a percentage of the average of your last five years' base salary, and the percentage is usually 1% to 1.5% times the years of service. So if you worked 25 years, and your company allows 1% a year, your benefit would be 25% of the average of your last five years' salary. If you would otherwise retire in 10 years when you have 35 years' tenure, that formula would help you estimate what you might receive if you stay at the same company.
Now, consider the buyout. Say you're 52, three years away from the company's earliest retirement age of 55, and you earn $120,000 a year. The company is offering you a $250,000 incentive bonus--roughly two years of salary. It's also throwing three extra years into your pension, so your ultimate benefit would be calculated assuming you work until 55. Then let's say you can land a $60,000-a-year job.
First, estimate three years of your salary after taxes (table). Then take the present value of that sum, using a discount rate of 5%--roughly speaking, the interest rate on a high-grade municipal bond. (Present value is a future sum expressed in today's dollars.) That comes to $208,000. Then you repeat the calculation considering the retirement bonus and the $60,000 job you think you can get after you leave the company. That comes to $253,000. "Based on these facts alone, the early retirement package appears attractive," says Marzano. Now suppose you had 10,000 stock options, worth just $300,000 now, but possibly a whole lot more a few years hence. If you have to forfeit these options, you have lost much more than you were offered in the retirement package. Your strategy would be to negotiate with the company to hold on to as many options for as long as possible.
There are, however, a number of things "companies can do to work the tax code to your advantage, and that is worth something," says Jim Marple, a New York-based retirement specialist at benefits consulting firm Watson Wyatt Worldwide. For example, rather than pay your incentive bonus out of payroll, which would be taxed as ordinary income, the company may be able to pay it out as a retirement benefit that you can roll into an individual retirement account, letting you escape taxes for now. Another sweetener might be the ability to take your pension in a lump sum, which you can transfer to an IRA, rather than collecting it on a monthly basis.
Receiving a buyout offer would certainly propel me to consult a financial adviser and possibly a lawyer just to review the legal aspects of the proposal. In fact, most companies will request that you sign a release so you don't come back and sue for age discrimination, says Marple. Consulting an adviser today can save you heartache later on. And at least you'll walk away from the table knowing you got yourself the best package possible.
By Toddi Gutner