I have heard from many people in the past few months that have received buyout offers from their employers. If your company has a pension plan, one of the biggest decisions you will need to make will be whether to take the retirement benefits as a lump sum, or to keep the traditional pension with monthly payouts. If the pension offers a joint and survivor benefit, payments will continue as long as one spouse is alive. This is valuable if you are worried that your spouse may run out of money if you were to die early. Some employees opt for the lump sum payout because they are worried that their employer may have financial problems and may not be able to pay the pension in the future. The Pension Benefit Guaranty Corporation guarantees your pension if your employer files bankruptcy, but only up to a certain amount that is adjusted every year. In 2020, the maximum guarantee for a 62 year old with a single life annuity is only $55,104 each year, and for a joint and survivor annuity, the amount is only $49,596. This may be less than what your benefit would be under your current pension plan.
If you decide to take a lump sum pension and roll it into an IRA, you are able to defer taxes until you need to start taking your withdrawals. You are then able to invest these funds and possibly obtain higher returns than you could have achieved with your existing pension. It is important to make sure the funds are invested in an appropriate asset allocation for your risk tolerance and planning horizon.
Some people are tempted to tap into their social security at age 62 when they are receiving an employee buyout. If you don't need this money to live on, there are many reasons you may want to wait as long as possible to file social security. If you start taking distributions at age 62, the amount you would receive is 30% less than if you wait until your full retirement age. For each year you can postpone receiving benefits after your full retirement age, you get an 8% increase in delayed retirement credits up to age 70. This will allow you to receive a larger amount of secure income in your later years, which can really help reduce the risk of running out of money down the road.
One of the biggest issues facing early retirees is how to pay for health care that was previously provided by your employer. If you are married and your spouse has medical insurance, this is usually the most affordable option. You can stay on your employers plan for up to 18 months under COBRA, but in most cases you must pay the employer and employee cost in addition to an administrative fee. COBRA is costly, but it would allow you to stay in the same provider network, so many people who are close to age 65 might want to choose this option. Another option is to find a policy through your state health insurance marketplace. These policies can become quite costly, but the insurer cannot turn you down for pre-existing conditions.
There are many things to consider when offered an employee buyout. It is important to have a good handle on what you currently spend and need to live on, and how your expenses may change. It is a good idea to consult with a financial planner to explore all of your options before making such critical decisions.
About the Author
Patti Hughes is a Chicago Fee-Only Financial Planner. Lake Life Wealth Advisory Group provides comprehensive and objective financial planning, retirement planning, and investment management to help clients organize, grow and protect their assets through life’s transitions. She is a fiduciary, and does not sell products or earn commissions, so she truly acts in the best interests of her clients.