Editor’s Note: This article was co-authored with D.L. Thomas.
No one thought 2020 would be like this: a global health crisis, an economic contraction and millions of Americans out of work. The rest of us, now bound to our homes, are unable to live our lives as we normally would, while essential workers are risking their lives to keep us all safe. Then, before we get to the light at the end of the tunnel, civil unrest swept across our nation.
Unfortunately, the bad news of 2020 is not stopping. As we move towards the end of the year, we are likely to see large companies restructure their business units, which will lead to layoffs and early retirement packages. Coca-Cola has just announced it is looking for 4,000 volunteers to accept buyout packages in the next couple weeks. If there are not enough volunteers, then layoffs will begin. Coke will likely not be the only company to do this. Delta and Ford Motor Company have also announced early buyouts and layoffs.
If you are offered a buyout, the options can seem simple at first. However, it’s important to understand the impact on your long-term financial goals, because some decisions are irrevocable with lifelong consequences if you get it wrong.
Here are a just a few of the decisions that an employee who is accepting a buyout (or layoff) may face:
Should I Roll Over My 401(k)?
This can seem straightforward. It can also create an opportunity to impact your taxes and potentially lower them in retirement. How? If you hold appreciated stock in your employer’s company in your 401(k), you may be able to use a Net Unrealized Appreciation (NUA) strategy to pay more favorable capital gains tax rates instead of income tax rates. But how you handle your rollover is important because if you move your employer stock out of your 401(k) without using the NUA strategy, you lose the option to do so—along with a significant portion of your gains to a higher tax rate.
How Will a Buyout Impact My Deferred Compensation Plan?
Deferred compensation plans are tricky because they can differ significantly between employers. If you have participated in a deferred compensation plan, you’ll want to answer the following questions before you decide.
- Each year that you defer compensation, you can select the payout period for that compensation—if you deferred compensation over several years, do they each have the same payout schedule?
- If not, how do those payouts impact your income in retirement?
- Are there multiple payout options?
- Are you getting all the income in one year in the future, subjecting you to higher taxes?
Understanding how and when your deferred comp will be paid out will help you understand the tax consequences. And this is especially important if you think you may be moving to another state. If you selected a payout period of less than 10 years, it will be taxed as income in the state where it was earned, however, if it is paid out over 10 or more years, it will be taxed in your state of residence. Understanding your options will help you make a decision that gives you the income you need and keeps more in your pocket during your retirement.
What Does a Buyout Mean for Your Pension?
Pensions are becoming rare, but if you are lucky enough to have one, making the right decision connected to your buyout can make a big difference for your bottom line. Pensions can take different forms, and you’ll probably have a couple options: a guaranteed income stream for life, a smaller payout that transfers to your spouse when you pass, or a lump sum rollover to an IRA. Which option is right for you depends on a number of factors, including your other income sources for retirement, your retirement goals and your life expectancy.
Should I Exercise My Stock Options?
Stock options are a great way to build wealth, but like all investing, they also come with risk. If you believe in the long-term value of your company, exercising your options might be a smart financial decision, but you should consider them in the context of your long-term goals and your overall financial plan. Other considerations include:
- How many are vested?
- What is the offer price relative to the current market price?
- How long do you have to exercise them?
- Should you exercise all of them?
Will Accepting a Buyout Leave You Without Life Insurance?
Many employees have the bulk of life insurance coverage through their employer, which may end when your employment ends. In some cases, your insurance policy may be portable, meaning you can “take the policy with you,” provided you continue to pay the premiums. Is your insurance portable, and if so, is that more cost efficient than buying it on your own? If it’s not portable, are you currently insurable? Do you have preexisting medical conditions that make buying your own life insurance too expensive or impossible? What happens to your family if something happens to you?
Will You Retire or Keep Working?
Can you afford to retire? If yes, are you ready to? If no, how quickly do you need a job? Can you get a job right now? Can you get the job you want? What talents do you want to use? What values are important to you in the workplace? Is entrepreneurship the right next step for you?
This time of transition may spark feelings of uncertainty and heightened anxiety that will almost certainly impact your decision making. It’s important to be aware of how you are feeling. There are lots of questions, and the answers will vary depending on your goals—both short- and long-term.
Working with an advisor can help you understand and clarify your options. To learn more and find out what the right move may be for you, contact a Wealth Enhancement Group advisor today.
CFP® Cindy’s skills in both math and science have attributed to her success as a financial advisor. Her degree in exercise science and work in sports management, along with her MBA, has helped her craft unique strategies for clients. Her mission of always doing what’s right, not what’s convenient, keeps her moving. Her husband and four children also keep her on her toes, balancing seasonal sports and her personal passion of writing. MBA, Pepperdine University BS, University of...Read More