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Retirement Planning > Spending in Retirement > Income Planning

Your Client Gets a Buyout Offer From Their Company. Should They Take It?

By Roger Wohlner

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What You Need to Know

  • General Motors recently announced it would offer a voluntary buyout package. It likely won't be the last major company to do so.
  • Help your client understand how the package will affect their retirement plans or any equity-based compensation.
  • A lump-sum payout could have tax implications.

General Motors will offer a voluntary buyout to a majority of its U.S.-based white-collar employees, CNBC and other news sources have reported. This comes on the heels of GM’s recent announcement that it would terminate about 500 salaried positions globally.

The GM buyout offer could be the first of many similar offers to come as large employers continue to announce layoffs.

If your client receives a buyout offer, here are some things to consider as you help them decide how to proceed.

Review Your Client’s Situation

If your client even feels there is a chance their employer might look to reduce their workforce, it makes sense to look at your client’s financial situation in the event of a possible job loss. This review should include:

  • The client’s age, marital status and the ages of any children.
  • Any other sources of income the client has. This can include income from a working spouse, income from investments or income from a side hustle.
  • Their source of health insurance and any options if they are laid off, including a spouse’s employer plan.
  • Take stock of all company retirement plans such as a 401(k), pension or nonqualified plan.
  • Does your client have any options or other stock-based compensation? What is the vesting status, and what are the exercise rules?
  • Cash and investments, both in taxable and in retirement accounts.
  • Their monthly spending.
  • The state of their emergency fund.
  • Their interests and career prospects. What would they do in the event of a job loss? Look for another job? Start a business? Retire?

Every client is a bit different, and there may be other important aspects of their financial situation to consider.

We saw big layoffs in recent months, so the GM and any future buyout announcements should not come as a surprise. This is a logical topic for your next client meeting for those who could be at risk.

The First Offer May Be the Best Offer

Not all corporate voluntary buyout offers are the same, and in GM’s case, the company seems to be casting a wide net in hopes of getting a large number of employees to accept the offer.

Quite often, an initial voluntary buyout offer will be the best offer your client will receive from their employer. If the company doesn’t get the needed number of employees to take the buyout and needs to reduce its workforce even further, the next round may or may not be voluntary. And the separation package likely will not be as generous.

Sadly, this happened a number of years ago when a friend was offered a decent buyout package by a major local employer but decided not to take it. About a year later, he was let go, and the severance package was not nearly as generous as the terms of the original voluntary buyout offer.

Evaluate the Buyout Package

If your client receives a buyout offer from their employer, be sure to review it carefully with your client. To incentivize employees to take the buyout and leave the company, many buyout offers are “sweetened.” The employer might offer enhanced compensation above their normal severance benefits if an employee was terminated from their position under normal circumstances.

As many buyout packages are designed to entice older, longer tenured employees to leave the company, some packages may include accelerated pension benefits and enhanced company medical coverage. Both can serve as bridges into retirement for clients nearing Social Security and Medicare eligibility.

If your client has stock options or other types of equity compensation from their employer, some packages may offer greater flexibility in exercising these options or the ability to take this compensation versus the normal vesting for these benefits.

Additionally, some buyouts may offer outplacement and other assistance to help those who take the buyout in their search for a new position.

Your client will be looking to you to help them evaluate what the buyout means to them on a financial basis. This can often be the hardest part of evaluating a buyout.

How Does the Buyout Fit With Your Client’s Situation?

This is the most critical question. No matter how favorable or unfavorable the buyout is, what’s important is how it will affect your client.

If your client is on the cusp of retirement, then the buyout package may allow them to leave a bit sooner if they are so inclined. It’s not uncommon for people to launch “encore careers” in retirement or semi-retirement, and enhanced benefits from the buyout may be tailor-made for your client if this is of interest to them.

For clients who are younger or who are planning on working for a number of years, the buyout can be a bridge to their next opportunity. This might be especially true if they have maintained their network of professional contacts and work in a function or industry that makes them marketable to other employers. If the buyout offers job search assistance and a generous payout, this can be a great opportunity for them.

If your client is in an area like engineering, technology, law or finance, there might be opportunities for them in consulting, including starting their own practice.

Taxes, Retirement Plans and Stock Options

Key areas where your client will be looking to you for advice include their 401(k) or other retirement accounts, any equity compensation and evaluating the tax impact of the payments via the buyout.

As far as their 401(k) or similar plan, determine whether they are vested in any employer contributions. From there, evaluate whether rolling the account over to an IRA or leaving it in the plan makes the most sense. In the latter case, this depends on the quality of the investments in the plan and how the employer treats the accounts of former employees. If your client finds a new position rather quickly, rolling their old 401(k) into a new employer’s plan may be beneficial.

With a pension, there may be a lump-sum option available or accelerated annuity benefits. You will want to run the numbers both ways if applicable to help advise your client.

In the case of stock options or other stock-based compensation, be sure to understand all vesting and exercise rules. From there, you will be in a position to help your client optimize these benefits.

Depending upon how their cash compensation under the buyout will be paid, there could be significant tax implications. Some companies might pay any severance as a lump sum; this could cause a jump in income for your client in the current year. If this is the case, there might be some planning steps to take to help offset the added income or otherwise take advantage of it.

The Bottom Line

If your client is offered a buyout by their employer, they will depend on you to analyze the financial ramifications of the package and to advise them. Beyond this, you can provide a  useful sounding board for your client as they decide whether to take the buyout or try to stick with their employer.

Speaking as someone with business experience and, more importantly, as a trusted advisor and confidant, I can say that you can play a key role in helping clients evaluate both the financial and nonfinancial aspects of whether to take the buyout and move on.

(Image: Adobe)

Roger Wohlner

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