When Does It Make Sense to Take a Buyout?

Summary

WSJ Your Money Briefing — "When Does It Make Sense to Take a Buyout?"

Date: October 8, 2020
Host: J.R. Whalen
Guest: Ann Tergeson (Retirement Reporter, Wall Street Journal)

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Episode Overview

This episode addresses a timely question: Should you accept a company buyout? As the COVID-19 pandemic forces many employers to trim staff, more American workers are faced with buyout (voluntary severance) offers. Host J.R. Whalen and WSJ retirement reporter Ann Tergeson unravel the financial and personal implications of accepting a buyout, outlining what you need to consider—health insurance, retirement, pensions, job prospects, and more—before making a life-changing decision.

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Key Discussion Points & Insights

1. Who Gets a Buyout and Why?

• Buyouts Not Limited to High Earners
  • While buyouts are “so-called early retirement packages” that may benefit those “close to retiring,” many companies offer them to a broad range of employees, not just those “in high salary positions” or by age. Selection is often by seniority or broader groups.
    (01:31 – 01:44)
• Motivation for Companies
  • Companies offer these packages to reduce headcount voluntarily and potentially avoid future layoffs without severance.

2. Decision Timelines

• Federal Law Mandates Decision Windows
  • Typically, if the buyout requires employees to waive legal rights (like the right to sue under certain laws), federal law gives 45 days to decide and an additional 7 days to reconsider after signing.
    (02:11 – 02:43)

3. Financial Planning Essentials

• Plug New Numbers into Your Plan
  • “The people who are in sort of the best position to understand the impact on their finances are people who probably already have a financial plan… it’s important to sort of plug new numbers into your financial plan.”
    — Ann Tergeson (02:48)
• Time Pressure
  • 45 days “isn’t necessarily a lot” when weighing complex factors—health insurance, retirement, and future employment.

4. Health Insurance Implications

• COBRA & Costs
  • If the employer has 20+ employees, you can continue health insurance under COBRA, but the cost will likely be higher since “employers are allowed to pass along more of the cost to former workers.”
  • If you’re not eligible for Medicare (under age 65), bridging coverage can be “very expensive” even under the Affordable Care Act.
    (03:34 – 04:45)
• Key Question:
  • “How much is the health insurance going to cost, how much of severance is going to be left over after I pay for that health insurance?”

5. Retirement Plans & 401(k)

• Impact of Interrupted Contributions
  • Consider how time away from work, potential pay cuts, or other changes might reduce 401(k) contributions and savings.
  • “Am I going to be putting my 401k contributions on hold, and what kind of impact is that going to have on the amount of money I’m going to be able to save when I want to retire?”
    (04:45 – 05:02)

6. Social Security Considerations

• Earnings Years Matter
  • Social Security takes “an average of your 35 highest earning years” to calculate benefits. Retiring early or downshifting to lower-wage work could reduce future benefits if the last years would’ve been among your highest-earning years.
  • Tergeson suggests using the Social Security website calculators for scenario planning.
    (05:07 – 05:56)

7. Pension Nuances

• Potential Enhancements or Reductions
  • Sometimes buyouts include early retirement incentives that “can actually enhance the pension benefit.”
  • Key question to ask: “What is my pension benefit, assuming I walk out the door this year, versus what would it be if I stay until I had originally planned to leave?”
    (06:02 – 06:36)

8. Negotiating the Buyout

• Generally Non-Negotiable for Groups
  • “If the package has been offered to a group of employees, chances are you’re not going to be able to negotiate it unless you have some kind of a legal claim...”
    (06:46 – 07:20)
• Exceptions for Legal Claims
  • Unique situations, such as discrimination or harassment claims, may open the door for negotiation.

9. Assessing Personal and Market Factors

• Job Market and Job Satisfaction
  • “What is the job market like for somebody, not just in general, but for somebody with my skills and my background, how much do I like my job?”
    — Ann Tergeson (07:28)
• Company’s Health and Layoff Risk
  • Some companies use buyouts to reach headcount targets before resorting to “future layoffs that maybe don’t include some kind of severance package.”

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Notable Quotes & Memorable Moments

• On Personalized Decisions
  “It’s a really complicated decision, and I think each person obviously has to weigh it out. There’s a variety of factors that can play into it.”
  — Ann Tergeson (00:39 & 07:28)
• On Health Coverage
  “If you are not eligible for Medicare yet... this can be very expensive to purchase, even under the Affordable Care Act.”
  — Ann Tergeson (04:15)
• On Negotiability “Generally, if you’re offered a buyout as part of a group... you’re not going to be able to do much in terms of negotiation.”
  — Ann Tergeson (06:46)
• On Planning “It’s important to sort of plug new numbers into your financial plan, if you have one, and try to calculate what kind of impact this is going to have.”
  — Ann Tergeson (02:48)

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Timestamps for Key Segments

• 00:39 — Ann Tergeson on the complexity of buyout decisions
• 01:44 — Which workers are targeted for buyouts
• 02:11 — Typical legal window for accepting and reconsidering a buyout
• 02:48 — Importance of financial planning when considering a buyout
• 03:34 — Health insurance implications and potential costs
• 05:07 — Social Security benefit calculations and early retirement impact
• 06:02 — Pensions: assessing the effect of leaving early
• 06:46 — Negotiability of group buyout offers
• 07:28 — Weighing the job market, personal satisfaction, and risk of layoffs

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Summary

This episode of WSJ Your Money Briefing offers a thorough primer for anyone facing a buyout decision, breaking down the financial, legal, and personal issues at stake. Ann Tergeson's advice: Take the time to do your “homework”—review health insurance changes, retirement impacts, pension rules, your job prospects, and the company’s stability. If possible, consult a financial advisor, run the numbers, and carefully consider your options before making a choice that could reshape your career and long-term security.

Transcript

[Deel Representative]

Deal replaces fragmented payroll vendors with one global system. No third parties hire, manage and pay teams in 150 plus countries. Operate like a local everywhere. Visit deel.com WSJ.

[J.R. Whalen]

Here's your money briefing for Thursday, October 8th. I'm J.R. whalen for the Wall Street Journal. Tens of millions of Americans have lost their jobs during the pandemic and for many of them, leaving their job was out of their control. But a growing number of companies are offering workers a buyout package, essentially a cash payment to quit.

[Ann Tergeson]

It's a really complicated decision and I think each person obviously has to weigh it out. And, you know, there's a variety of factors that can play into it. You know, first of all, the job market. What is the job market like for somebody, not just in general, but for somebody with my skills and my background, how much do I like my job?

[J.R. Whalen]

And buyouts can have a long term impact on savings, insurance and retirement plans. Our retirement reporter Ann Tergeson will go over the important questions you should ask if you're offered a severance package. That's after the break. As companies look to reduce staff during the pandemic, more are offering workers buyouts to leave voluntarily. But while a cash payment to leave might sound attractive and it may not be the right thing for everyone, our retirement reporter Ann Tergeson joins me now to discuss. Anne, thanks for being here.

[Ann Tergeson]

Sure.

[J.R. Whalen]

So these buyouts or so called early retirement packages, you know, they work well for people in high salary positions who are close to retiring. But a lot of times workers across several pay grades get offers.

[Ann Tergeson]

Well, it just depends on what the company's offering. It's hard to know, you know, from company to company. There can be a lot of variation in terms of what they're offering and you know, whether they're targeting. I mean, typically they will target a broader population than just people who have high salaries or they certainly would be unlikely to target people by age, but they might target people by seniority.

[J.R. Whalen]

So let's say somebody's offered a buyout, do they have to decide whether to take it right away?

[Ann Tergeson]

It just depends on how the buyout's structured. But typically if it's offered to a group of people and it requires them to sign a release waiving the right to sue under certain laws, there typically is like a 45 day window in which federal law gives employees to make a decision and then they have a set seven days after that. And if they go ahead and take the package, they have seven days to reconsider after that. But it can vary because employers are free to offer more time.

[J.R. Whalen]

But taking a buyout can change factors in many equations in someone's life, like their health insurance.

[Ann Tergeson]

The thing is, 45 days, it seems like a lot, but really sometimes these packages can be a complicated thing to figure out. So 45 days isn't necessarily a lot. The people who are in sort of the best position to understand the impact on their finances are people who probably already have a financial plan and work with, maybe work with a financial advisor on an ongoing basis or maybe they have like a, you know, somebody who they can turn to just for, you know, one time advice. Because it's important to sort of plug new numbers into your financial plan, if you have one, and try to calculate what kind of impact this is going to have.

[J.R. Whalen]

Okay, but there's also some other long term math involved, like how a buyout affects someone's retirement planning and 401k earnings, you know, regardless of how old they are.

[Ann Tergeson]

Right, exactly. Now, you had mentioned health insurance, which is something that definitely people need to investigate. So, you know, if Your employer has 20 or more employees, then you are under, under a federal law called cobra, you're entitled to remain on the plan, but it doesn't mean that your costs are going to be the same for that health, same health insurance as when you were an active employee. Because under the COBRA law, employers are allowed to pass along more of the cost to former workers. Also, if, I mean, if you have like a spouse who, you know, has health insurance coverage, that sometimes works out to be cheaper. But there are other people who, you know, if they can't go on cobra, they have to figure out how to get this insurance. And if you are not eligible for Medicare yet, because you're not 65, but you're sort of in that, you know, 55 to 65 window, this can be very expensive to purchase, even under the Affordable Care Act. So these are the kind of questions that people need to investigate before they decide whether to take a package or not. You know, how much is the health insurance going to cost, how much of severance is going to be left over after I pay for that health insurance. And to your point about retirement plans, it is important to also figure out if I'm going to be taking a pay cut for my next job, if I might be unemployed for a while, am I going to be putting my 401k contributions on hold, and what kind of impact is that going to have on the amount of money I'm going to be able to save when I want to retire?

[J.R. Whalen]

And there are a lot of factors with Social Security that are kind of tricky, but it's really important to keep track of.

[Ann Tergeson]

Yeah, I mean, it just depends. You know, for people who've had like a pretty long employment history, the way Social Security calculates these benefits is pretty complicated. But they, you know, they take like an average of your 35 highest earnings years. So say you're, you know, 58 years old and you were counting on the next four or five years being among your highest earnings years. Then by, if you were going to sort of retire early or maybe retire and take a part time job where your earnings are going to go down a lot, that could have an impact on the formula. So it just depends on where you are in your career. It depends on how much of a pay cut you might have to take going forward. But that is something that you also can investigate by going on a calculator at the Social Security website and entering in your future earnings years with a variety of assumptions.

[J.R. Whalen]

And for employees who have a pension, what kind of questions should they be asking if they're thinking about taking a buyout?

[Ann Tergeson]

Right. So pensions can be complicated. It also depends on the terms of the buyout. Sometimes employers in buyouts will offer early retirement incentives that can actually enhance the pension benefit for people who choose to take the package. But, you know, I think it's important at the very least to try to find out from your employer, what is my pension benefit, assuming I walk out the door, you know, this year, versus what would be my pension benefit if I were to stay until I had originally planned to leave? And, you know, so you can just assess how much of a cut am I taking in that pension, if any at all?

[J.R. Whalen]

Okay, now you know the amount offered to employees in a buyout package, that'll vary from company to company. But is the amount offered typically locked in or can it be negotiated?

[Ann Tergeson]

The simple answer is that if the package has been offered to a group of employees, chances are you're not going to be able to negotiate it unless you have some kind of a legal claim, like maybe a discrimination claim or a sexual harassment claim that you know that is viewed by the employer as being something that you know that they'd rather settle. They might be willing to negotiate, in that case, a higher severance package or better terms. But generally, if you know, if you're offered a buyout package as part of a group of employees, you're not going to be able to do much in terms of negotiation.

[J.R. Whalen]

So there's a lot of homework here and a lot of things to consider. And for, you know, a lot of people, if they have the option, it might make sense to not leave the company.

[Ann Tergeson]

Yeah, it really depends. It's a really complicated decision, and I think each person obviously has to weigh it out. And, you know, there's a variety of factors that can play into it. You know, first of all, the job market. What is the job market like for somebody, not just in general, but for somebody with my skills and my background, how much do I like my job? I mean, you know, for people who've had, you know, they don't maybe like the person who they're working for or they feel like their recent performance reviews haven't been so good, they might feel more inclined to take it if they don't like the job or they feel like they're sort of haven't gotten very positive feedback recently. So it just depends. And you know, I think one concern in the type of economy that we have right now is that, you know, in some cases these buyout packages can be the companies offer them in order to get a certain percentage of employees off the payroll so they can hopefully not have to make future layoffs that maybe don't include some kind of severance package. So that's another thing that you have to consider is the overall health of the company.

[J.R. Whalen]

All right, that's Wall Street Journal retirement reporter Ann Tergeson. Ann, thanks for coming on the show.

[Ann Tergeson]

Sure, you're welcome.

[J.R. Whalen]

And that's your Money briefing. I'm J.R. whalen for the Wall Street

[Deel Representative]

Journal deal replaces fragmented payroll vendors with one Global system. No third parties. Hire, manage and pay teams in 150 plus countries. Operate like a local everywhere. Visit d e l.com WSJ.