Here’s what to consider before taking out a job buyback

Airlines try to win over thousands of their employees make early redemptions as they look for ways to cut costs in the face of continued low demand. In addition, the pandemic-induced recession is likely to lead to a larger wave of offers for voluntary departure – that is, buy-back and early retirement – from employers. If you are over 55, have worked for your employer for more than a decade, and / or are one of the top earners in your business, you may be faced with a buyout offer in the near future.

Financial advisers say they see a wave of clients coming to their doorstep, starting offers in hand, wondering what to do next. “I’ve had about 10 of these meetings over the past week,” says Dana Levit, owner and director of Paragon Financial Advisors in Newton, Massachusetts.

Whether or not an early retirement buyback is the best financial choice for you depends on your current and future expenses, living expenses, as well as important obligations like a child’s college education. It also depends on how close you are to retirement and how easily you think it will be to find a new job – or even if a new job is in the cards at all.

Of course, refusing an early retirement offer does not guarantee that you will keep your job, either. The unpredictable nature of COVID-19 – and the concerns of some public health officials about a potential resurgence of the disease – could make your job less safe than it was six months ago.

Financial advisers say that if you meet the following conditions, using the pandemic to start your retirement might be a good decision.

You are ready to haggle

No two voluntary departure offers are alike. “Some are very extensive and include ancillary benefits that include money that could be used for financial or legal services. I’ve also seen buyouts that are really small and don’t even include health care, ”says Melanie Kahrs, wealth manager at Campbell Wealth Management in Alexandria, Virginia.

This means you need to read the fine print, but it also means you have the opportunity to negotiate more favorable terms like an extension of health care benefits or a staggered distribution to mitigate the tax impact. Every financial planner Money has spoken to has pointed out that everything from the amount offered to you to the benefits (if any) included is negotiable. Keep in mind that you might receive a large sum of money, but your employer also gets something out of this trade by freeing themselves from your compensation costs.

You can afford to stop working

“The best buyout offer is one that can bridge the gap between now and when you want to be able to retire,” says Luke Lloyd, investment strategist at Strategic Wealth Partners in Independence, Ohio.

Many people who take buyouts don’t see them as a quick route to retirement, but in this economy, you need to be prepared for it. Depending on your industry and your age, it may be more difficult than you think to get back into the ranks of employees. “Ask yourself what is the worst case? What if I never go back to work? Levit said.

And if you’re planning on making a buyout and continuing to work elsewhere, you’ll also want to check out any non-compete covenants you might have signed, which could bar you from taking the plunge to a competitor for a set period of time. (This is also something you might be able to negotiate for giving up, however.)

You have a plan for your financial future

If you get a lump sum buyout offer (the most common option today, according to financial planners surveyed by Money), make a detailed plan of what you’re going to do with that money. before having it in hand.

Calculate your current and future expenses, then go back to see how much income you will need to generate. Social Security only replaces about 40% of the average worker’s income, and if you’re under 59 and a half, you’ll have to wait until then to start mining your 401 (k) without incurring a penalty. (In addition, advisors recommend postponing the exploitation of these two sources of income for as long as possible to obtain maximum returns.)

Conventional wisdom says you can withdraw 4% from your portfolio per year, but if you retire early you run a higher risk of exhausting the assumed 30-year time horizon on this equation. If you have more than a few years before your expected retirement age, also be aware that you will no longer be contributing to your 401 (k), so future earnings will only come from growing your existing contributions.

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You have (or can sculpt) a silver cushion

While six months of spending can be a good emergency savings cushion for workers, the math changes if you stop earning a salary. Plus, recent market volatility means you’ll need a bigger buffer to avoid having to sell assets if stocks crash.

“How much do you have in cash or cash?” Levit said. “If people go into this 100% investment in the stock market and this buyout is all their money, I would say don’t invest it because they will need something to live on.” In this current market climate, she recommends families keep spending three years in cash.

And while it’s common for people to take part of a lump sum to pay off credit cards or other large debts, Levit doesn’t recommend paying off your mortgage sooner. “It’s very, very difficult to get money back from homes, so I tend to keep cash and not pay off mortgages,” she says.

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You are ready for the fiscal coup

A lump sum buyout that doubles or triples your income for the year is likely going to mean a big increase in your tax bill, so factor that into your budget.

There are several ways to spread or lessen the tax burden. Both of these tactics can lower your total tax bill in April and could also keep you out of the top marginal tax bracket.

Your employer may give you the option of putting some of your buy-back money into a tax-deferred account such as a 401 (k) account or a health savings account (HSA). Keep in mind that a 401 (k) will likely leave you with more limited investment options than an IRA – if you want the flexibility to pick and trade stocks, tax deferral might not. not worth it. Or, Lloyd suggests asking if your business is willing to spread the payment over several years, although there is a risk if the business collapses during that time, as buybacks don’t come with backing protections. retirement type.

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You have access to affordable health insurance

For many people, health insurance will be the most important deciding factor when evaluating their options for voluntary separation. Some buy-back packages include a fixed amount – usually one year – of continuous health coverage. Whether it’s when you leave or when that extra health coverage runs out, you can access COBRA for up to an additional 18 months – although you can expect to pay double, if not more, for the same coverage since you’ll also be paying. the part of your premium that your employer used to pay.

If that still doesn’t get you to 65, the age at which you can get health coverage through Medicare, you will need a health insurance plan, which will likely be through your spouse’s employer, Healthcare.gov. or your state. individual market. Since the cost of maintaining your current coverage and what is available in your state makes it difficult to estimate a rule of thumb that will work for everyone, you’ll want to do some research to determine how much you should allocate per year up. ” until you reach Medicare eligibility.

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