Web Exclusive. . . Buyout Offers: Don't Think of It as Winning a Lottery
By: Joseph Anthony and Fern Shen; Source: AARP Bulletin Date Posted: 2006-10-04 10:46:00-04:00
Looking back on his buyout, Jim Gaudette knows things worked out pretty well for him, but it sure didn't feel that way at the time.
In June 2001, when Lucent Technologies Inc. announced that it was offering buyouts to approximately 13,000 U.S. employees, Gaudette was 45 years old and had put in 22 years at Lucent's plant in North Andover, Mass. The struggling telecommunications giant was in a fit of downsizing. Gaudette, who worked in software maintenance and tech support, looked at the company's buyout offer and realized that he was, just barely, eligible.
To qualify, you had to be 50 years old, with at least 15 years of service, but the company was also adding an extra five years to employees' age and an extra five years to their time of service. That made Gaudette, under the magic of the formula, a 50-year-old, 27-year veteran who was therefore eligible for a full pension.
Still, Gaudette didn't see himself taking it, at first. "It was a very disruptive thing for me," he says.
"I wasn't looking for money to retire," Gaudette says. "Lucent used to be AT&T; it was the kind of company you stayed with until retirement. We all had our whole lives mapped out—staying there, collecting a pension from there."
Soon, though, Gaudette came around, not because the package seemed so attractive—the pension alone would not support him, his wife and three kids—but because turning it down seemed so risky.
"The writing was on the wall that if you stayed, things might not go well, the company would keep having problems and you might lose your job," Gaudette says.
Gaudette took the package and has since supported the family with a home remodeling company that he started with another ex-Lucent worker, who also took the buyout offer.
Of one thing, though, Gaudette is quite certain: he made the right decision.
"After I left," he says, "most of the people in my old department were laid off."
Wall Street looks favorably on buyouts like Lucent's or the recent (June 26) announcement by GM that it was offering buyouts to 35,000 hourly workers. For instance, by the close of trading on the day of its announcement, GM shares—which had fallen by 42 percent over a 30-day period at the start of the year—closed up 78 cents.
Comparable employer buyout offers within the telecommunications, energy and technology industries have met with the same receptive response from financial institutions as did GM's.
Indeed, the buyout offer has become an accepted way for corporations to trim their payrolls without firing workers or confronting unions head-on. A company makes a buyout offer because it believes the buyout will help the company's long-term financial health. But what about the financial health of employees, who must re-evaluate retirement expectations, employment options, health care needs and more?
How a buyout typically works
Buyouts are in some ways a classic carrot-and-stick game. The carrot is the payment you get for leaving your job. The stick is the possibility of later layoffs without any of the benefits that come with the buyout. While most employees can't predict how their company is going to do financially, you have to think about what the future might hold for the business. You'll want to give the buyout offer stronger consideration if you think your job security is tenuous in any case.
Up-front cash is the most obvious buyout incentive. The ability to keep some of your employee benefits is another. Getting some type of a boost toward your eventual retirement payments is a third sweetener.
"Buyouts can also include an increase in your pension benefits—for example, the company may offer to add a certain number of years to your service for the purpose of pension calculations," says Laurie McCann, a senior attorney with AARP.
McCann recommends that regardless of the offer, you take the time to be sure of what you want to do before signing on the dotted line. "Often a company will request that you agree to sign a waiver of your rights under the Age Discrimination in Employment Act if you are accepting a buyout offer," she says. "Employees should know they have 45 days to decide whether or not to sign [the waiver], and that they also get seven days to revoke the waiver after signing it."
A dollar received is not a full dollar kept
Can you get the payment now rather than later? Buyouts may be structured as a single, large up front payment, or may be stretched out over several years. But if a company offers a buyout over many years and then later goes out of business, you could wind up being just another creditor.
Financial professionals say that when in doubt, get the payment up-front. "The buyout is an unsecured promise to pay," says Wayne Starr, a CFP with BKD Wealth Advisors LLC in Kansas City, Mo. "If they are doing this in order to put themselves in a better position, are they still going to be here to make those payments years later?"
In addition, comparing lump-sum distributions against substantially equal payments made over several years usually requires making projections that include variables like investment rates of return, inflation, and after-tax earnings. "The answer to whether it is better to take a lump sum or a payment over several years, like an annuity, lies in computing the rate of return within the annuity and the rate of the return on the assets outside of the annuity," says Earlaine Klingler, a CFP with McQueen, Ball & Associates, Inc., in Bethlehem, Pa.
Translation: consult with a financial professional before accepting any buyout offer.
Even for younger employees, deciding whether to take a buyout check can be a terrifying experience, especially if they're feeling shaky about their job prospects.
Keep in mind that a dollar received in a buyout typically is not a full dollar kept after taxes. If the buyout is considered severance pay, it could easily push you into a higher tax bracket than you're used to dealing with. "I've seen people get a $200,000 employee buyout and then after taxes find that they have only $130,000 left," says Doug Van Allen, a CFP and owner of Marathon Wealth Management, a financial planning firm in Portland, Oregon.
Facing an unexpected transition
Bob DeLorenzo, 50, understands buyouts from two points of view—his own, as an older former Gillette Company employee with 26 years of service, and that of his younger colleagues, whom he counseled through the decision-making process as they pondered offers.
The Boston-based razor maker told employees in January 2005 that the Procter & Gamble Co. was acquiring Gillette. From the beginning, it was clear that Cincinnati-based P&G would shed staff.
For DeLorenzo and those like him with at least 20 years of service, the choice to accept P&G;'s offer was ultimately not a hard one. Gillette workers were offered a severance package based on a calculation of age and years of service plus 26 weeks, with long-time employees getting the best deals. DeLorenzo got 92 weeks—almost two years' pay.
The company "bridged" those who were within five years of retirement age. These "bridged" severance packages, paid out over time just like a paycheck, made some older employees eligible for retirement.
During the time DeLorenzo is covered by the package, he can still contribute to his 401(k) plan and has the same insurance and medical and dental benefits as when he was working. At the end of 92 weeks, he will retire and receive his pension checks and retirement health benefits, ensuring his family's health coverage.
"In our little groups, our carpools and lunch groups, everyone started to talk about what they wanted to do—teach, spend more time with their families, start their own businesses," DeLorenzo says.
"The resumes and emails were flying all over the place," he recalls, as people sought new jobs that would begin while their P&G; severance money was still coming. "Everyone was hell-bent on figuring out ways to do what was affectionately known as 'double-dipping.' "
DeLorenzo helped them think through all the factors. Could they move? What kind of position could they have with P&G;? And how secure would they feel? How did they like the company's corporate culture? And how did the company feel about them? How much would they get in severance and how employable would they be if they left?
The musically inclined DeLorenzo, who has been playing the drums since the age of nine, is now a vice president for business development with one of the world's largest makers of cymbals and drumsticks, Zildjian, about 15 minutes from his home.
Health coverage: a deal breaker?
Health benefits are a huge issue for people in their 50s and early 60s who have been covered under an employer-provided health care plan. Finding an affordable individual health insurance plan can be difficult if not impossible; maintaining and paying for your coverage under COBRA can be prohibitively expensive and is good for only a limited period of time.
Keeping her health insurance coverage was crucial to Megan Rosenfeld's decision to accept a buyout offer from The Washington Post earlier this decade. Rosenfeld, a long-time feature writer for the Post, took a buyout in 2001. Now 60, she is still covered by the company's health insurance and will remain eligible for coverage until she qualifies for Medicare. "The insurance is more expensive than it used to be, but the key was having it," she says. "Losing the health coverage would have been a deal-breaker."
Should you…wait?
Sometimes, companies will have more than one round of buyout offers. In 2006, the Post offered a buyout that included up to two years of full-time pay and benefits—a much more generous deal than what employees like Rosenfeld had accepted five years earlier.
In another case, Gerard O'Neill, a Pulitzer prize-winning ex-Boston Globe reporter with 35 years at the company, sued the Globe in 2002, saying his bosses tricked him into accepting a buyout offer less generous than the one offered colleagues shortly after. In 2005, he lost the case on appeal.
But turning down a buyout offer in the hope of getting a better deal later can be a gamble. "Usually, there's not that much room for negotiation for most employees," says Wayne Starr. "A company puts out its package and that's pretty much it. They might put out a new offer later, but there also might never be another offer."
Joseph Anthony is a tax professional in Portland, Ore., who writes about finance and tax issues.
Additional Related Links
The Big Freeze (March 2006)
Pension Concerns? (March 2006)
The Do-It-Yourself Pension (September 2005)
Glossary: Pension Terms (November 2003)
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