Monday, June 8, 2020
Countdown to Financial Fitness: Should You Take an Early-Out Package?
Countdown to Financial Fitness: Should You Take an Early-Out Package?: Many businesses, particularly those in the travel industry, have been hit hard by the coronavirus pandemic. Thanks to government assistanc...
Should You Take an Early-Out Package?
Many businesses, particularly those in
the travel industry, have been hit hard by the coronavirus pandemic. Thanks to
government assistance, companies accepting aid have postponed massive layoffs and
pay cuts. But some are now trying to reduce their payrolls by offering
early-out incentive packages.
I spent my career in the airline
industry and witnessed many ups and downs. Every few years, the company offered
early-retirement and voluntary-departure packages. Sometimes, they're very tempting.
In 2008, I took an early retirement
package. It was right for me, and most of the time, I haven't regretted my
decision. I did get chilly feet when the financial markets crashed after the
ink was dry on my signed severance papers, and my retirement accounts were
suddenly worth a lot less than before. Fortunately, my company invited me back
to work as a contractor several times over the years, which enabled me to bring
in extra income to rebuild and increase my investments instead of drawing them
down.
My husband is now faced with a similar
decision. To stay for an uncertain future? Or take a lucrative package now and
go?
Here are some considerations if you're
faced with the decision about an early-departure package:
· What are you leaving behind?
We spend so much time at work that it's hard to separate our professional life
(camaraderie with colleagues, the vocabulary of the trade, inside information,
perks of the job) from who we are outside of our careers. Of course, some of
your work friends may leave, but some will stay, and relationships will change
when you're no longer an insider. Do you enjoy your job? Will you miss it? If
you stay, there might be some great promotional opportunities resulting from
vacancies left by senior employees and grass-is-always-greener go-getters. On
the other side of the coin, things may get worse and you might get laid
off—without an incentive package. What is the company's prognosis?
· What comes after?
Will you feel lost without a workplace to go to every day? Or do you have
plenty of hobbies and social activities to fill your days? If you're too young
for Social Security and don't have a pension—and even if you can draw both—you
might need to get another job. Have you researched the job market? At the
beginning of 2020, unemployment was historically low and jobs were plentiful.
That changed overnight. Even though recovery is looking better than expected,
there's a lot of competition out there, and you might end up settling for a
position much less attractive than the job you're leaving. Have you fine-tuned
your resume and honed your marketable skills? Have you built your network?
· What are they offering?
Regular retirement benefits most likely won't change if you decide to wait,
unless certain perks are being discontinued. In the "enhanced retirement"
package my husband is considering, a severance check equal to six months'
salary is included. A severance payment can be a great jumpstart for an
emergency fund if you don't have one. But keep in mind, payroll taxes will be
deducted, so the actual amount will seem much smaller than promised. My
husband's package also comes with some positive-space passes, which are like
gold for airline employees used to traveling space available on crowded
airplanes, and not looking forward to being demoted to a lower standby priority
after retirement. However, there is a finite number of confirmed tickets; it's not
an annual allotment.
· How will you manage without your major
source of income? Can you afford to live without a
paycheck? In my case, we were debt-free and had recently paid off our mortgage.
We didn't have any children to educate. If you have a lot of bills, think twice
about leaving unless you have a new job lined up. If you're lucky enough to
have a pension and are ready to start taking Social Security, will that income
cover your expenses and maintain the lifestyle you desire? If not, how will you
make up the difference? Can you work part-time, or provide contract services?
Do you have investments you can tap?
· What will you do about health care?
In our country, this can be a deal-breaker for many would-be early retirees,
where health insurance coverage is still mainly tied to employment. When I
retired, my husband was still working, and I was eligible to be covered under
his plan. Now we're both eligible for Medicare. Nevertheless, premiums must be paid,
and Medicare doesn't cover everything. Most retirees purchase supplemental
insurance or a Medicare Advantage plan to bridge the gap. And the array of
choices will give you a headache. My husband's enhanced retirement package
includes a generous Retiree Medical Account (RMA). Similar to a Health Savings
Account (HSA), it can be used to pay qualified medical, dental, prescription
drug, and vision expenses, including Medicare premiums. Unlike the HSA, which
the insured person controls, the RMA is controlled by the company. The account
owner pays for the services upfront and then submits a claim for
reimbursement. Still, an excellent incentive, provided the company continues to
follow through with the obligation.
If you're faced with a decision about
whether to take an early out/retirement/severance package, take your time to
read all the fine print. Weigh the pros and cons. Write them down.
Talk to your colleagues. Keep in mind,
everyone's situation is different. But they may uncover some concerns or benefits
you've overlooked.
Discuss the situation with your family
and make sure they are comfortable with the potential lifestyle changes ahead.
If you don't already work with a financial planner, now might be the time to
talk to one. Evaluate carefully so you don't regret giving up a valuable career
before you’re ready, or passing up the opportunity of a lifetime.
What are your thoughts about leaving a
job at this time? I'd love to hear your comments.
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