When Should You Accept a Buyout?

General Motors Corp., along with its former subsidiary, Delphi Corp., are the latest major companies to offer early retirement incentives as a way to trim their workforce and cut costs. On March 22, the companies announced that altogether they would offer buyout packages to more than 125,000 union workers, making this one of the largest offers of its kind in U.S. history.

The decision is now in the employees' hands. But how do you know if a buyout is a good deal? It depends on how close you are to retirement, says Mark Cortazzo, a financial planner and senior partner with Macro Consulting Group in Parsippany, N.J., who has evaluated scores of buyout proposals for clients who worked for major telecommunications and pharmaceutical companies.

If you are planning to retire in a few years and your company offers you a two-year severance package, it's a pretty easy decision, says Cortazzo. "You can stay home and get paid as much as you would if you had kept on working." Or, he adds, if you are afraid of getting bored, you could pick up a part-time job doing something you really enjoy, and all those earnings would be gravy on top of your severance package.

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But if you are still four, five, or more years away from retirement, it can be a tougher decision. Mid-career workers might want to check out other job prospects before agreeing to an early-retirement buyout. You should also consider the long-term viability of your current employer. While you may want to continue working in your current position, what are the chances that your job will be there in a few years? If the company's future is questionable, it might be better to take the buyout offer and start looking elsewhere.

Valuable benefits

One aspect that can make or break a decision to accept a buyout is whether it includes retiree health benefits, says George Papadopoulos, a CPA and financial planner in Novi, Michigan. "Retiree health benefits are critical to retirement security," he says. A recent study by Fidelity Investments estimates that a 65-year-old couple retiring today without employer-provided health benefits would need a nest egg of $200,000 just to finance out-of-pocket medical costs, such as medicare premiums, co-payments and medigap insurance expenses. And that eye-popping estimate does not include long-term-care costs.

Another major consideration is whether to elect a lump sum or a traditional pension for the rest of your life. And if you choose the pension, do you take a larger amount with no survivor benefits, or a smaller amount during your lifetime that would pay benefits, usually at a reduced level, to your surviving spouse?

The easiest way to figure out whether a lump sum or a traditional pension is the better deal is to compare how much of a monthly payment you could get if you used the lump sum to buy an immediate annuity from an insurance company. You can compare prices at Web sites such as www.annuityshopper.com. For example, a 65-year-old man who bought an immediate annuity for $100,000 would be guaranteed about $660 a month for the rest of his life, no matter how long he lived. But a 65-year-old woman could expect to receive only about $620 a month from the same $100,000 investment, because women, on average, live longer than men. If the pension offer is larger than the estimated annuity payment, consider taking the pension.

Investing a lump sum for the rest of your life can be challenging in the current economic environment with interest rates, which affect annuity payouts, near historic lows and stock market performance less than stellar. Another option is to take the lump sum and park it in a money-market fund currently paying more than 4% until better investment opportunities come along. Or you could wait a few years to buy an annuity because interest rates might be higher and you would be older -- both factors that lead to higher annuity payouts.

There's one final consideration -- the emotional impact of leaving your job. "The decision is rarely just about money," says Cortazzo, who notes that many long-tenured workers don't want to leave a job they love or are afraid to try something new. "The unknown is scary, but I don't have a button on my calculator for that," he says.