The classic TV game show “Let’s Make a Deal” often offered contestants the choice of prizes hidden by three curtains. Two would contain terrific goodies while the third held some laughable dud — perhaps a broken toilet or a pair of goats.
Just to heighten the mystery, host Monty Hall would often tempt players with a wad of cash in exchange for passing on the curtains. The question was clear: Take what you know or take a chance on the unknown.
“Let’s Make a Deal” has been relegated to TV archives, but many employees might experience that same level of jittery indecision when offered a buyout from their employers.
“I refer to it as the ‘Let’s Make a Deal’ model,” said New York career coach Roy Cohen, author of “The Wall Street Professional's Survival Guide.” “There are just so many unknowns, there can be complete uncertainty about the outcome.”
Being paid to leave your job might seem a dream come true for many employees. But what's behind the curtain isn't clear-cut. Experts say it pays to have a solid strategy in place to help make the best decision possible.
Opportunity or pitfall?
Buyouts — generally offered by companies looking to pare expenses — have been common for years. In one of the largest, General Motors several years ago offered buyouts to more than 100,000 hourly workers.
In essence, a company executes a buyout by offering employees financial packages in return for leaving their jobs. The offers can involve early retirement packages, severance payments, accumulated vacation and sick pay and other benefits.
That may seem straightforward, but an employee’s decision whether to accept a buyout can be anything but simple.
“It’s a lot more complicated than it seems because there are all sorts of financial and psychological factors involved,” said Robert Laura, author of “Naked Retirement.”
A complicated decision isn’t made any easier with a poorly thought-out choice. As Laura put it, many buyout decisions derive from little more than “a lunch table discussion” with friends.
Rather than mimicking what others have done, it’s critical to carefully weigh a variety of factors — starting with what you plan to do if you say yes to the buyout.
“Are you going to truly retire or do you plan to keep working in some other way?” asked Hersh Shefrin, Mario L. Belotti Professor of Finance at Santa Clara University’s Leavey School of Business. “Retirement can be death unless you know what activities you’ll have to keep you busy.”
“Can you replace your work identity?” Laura asked. “I know of people who kept logging into their work computer even after they retired.”
If some other type of work or employment is attractive, take a hard look at your employability. Someone in their 40s may have little trouble finding a new job. By contrast, an older buyout recipient may find new job opportunities harder to come by.
“At the very least, if you’re older, a job search may take longer than it might for someone younger,” Cohen said.
Take other factors into consideration as well. For instance, find out who else has been offered a buyout. Are they in the same division of the company or somewhere else? Investigate the aftereffects of any prior buyouts — did employees who refused end up losing their jobs eventually? Perhaps surprisingly, Cohen said, some employees who reject a buyout actually receive a more attractive package as part of a subsequent “divorce” settlement.
Run the numbers carefully
Psychological factors aside, it’s critical to examine the financial particulars of any buyout offer. Boiled down, you need to know if the money being offered — and the way through which you receive it — will be adequate to support whatever future plans you may have.
Consider the payout mechanism. In some buyouts, employees are paid a lump sum, while others receive a series of payments over time. If the money comes all at once, think about what you’re going to have to do to make the money last as long as necessary, be that while looking for a new job or in retirement. That can mean devising an investment strategy that considers not only long-term investment returns but also how much you can afford to “pay” yourself on a regular basis so you don’t run out of funds prematurely.
The best bet: Talk with a financial advisor to get a sense of your options. Laura recommends chatting with at least two financial pros to consider as many viewpoints as possible.
More to consider
As if that weren’t enough to juggle, it’s prudent to give some thought to several more buyout-related issues. Don’t be afraid to negotiate elements of a buyout offer. Ask if any company stock you may own is part of the package. Laptops and company-owned cellphones may also enter into the mix of what you can receive.
If you’re planning on looking for a new job, make sure your current employer will be willing to give you a positive reference. Also, be wary about signing any sort of non-compete agreement as part of the buyout. That could keep you from landing a new job with another firm deemed a competitor.
However important finances may be, don’t look as them as the only — or even the most critical — issue to be considered when weighing a buyout. Money certainly matters, but there are many other questions the answers to which you want to get right.
“You have to really think about why you want to accept the buyout,” Laura said. “If all your friends are at work and you don’t know what you’re going to do with yourself, all the money in the world won’t matter. You’re going to be miserable.”