The pros and cons of taking a company buyout
By Maryalene LaPonsie/MoneyTalksNews
United Airlines is flashing some cash in the hopes of persuading at least 2,100 of its senior flight attendants to stop flying the friendly skies.
The company's buyout proposal would put up to $100,000 in the hands of attendants who agree to part ways with the company. The airline is just the latest big company to use a buyout proposal to reduce costs and downsize their workforce. GM, for instance, used a buyout to shed 35,000 workers back in 2006.
Buyouts can be a win-win for both the company and workers. Employees get a tidy sum to fatten their bank accounts, while the company can eliminate high-paying senior positions in favor of hiring new workers at entry-level wages. In United's case, it's expected to allow the company to also call back 1,450 furloughed attendants.
Still, taking a buyout is no no-brainer. Here are some of the pros and cons of walking away with the money:
Pro: All that money - woo-hoo!
Imagine waking up one morning to a $100,000 bank account balance. What do you think that feels like? I don't know either, but I bet it feels rather amazing.
All that money, money, money is probably the biggest pro of accepting a buyout. Cash in the bank provides all sorts of freedom. You could invest it; you could pay off debt; you could finally take that second honeymoon. The possibilities are rather exciting, right?
But before you go too crazy spending all that dough, we really need to discuss Con No. 1.
Con: It's really not a lot of money
OK, $100,000 sounds like a ton, especially for those of you living on minimum wage, but it really won't last as long as you think. Plus, Uncle Sam is going to want his piece of that six-figure pie.
Let's consider our friends the flight attendants. Over at Salary.com, the median income for a U.S. flight attendant is pegged at $67,284 as of September 2014. So with a $100,000 buyout, that gives someone with a median income about 18 months to find a new job before the cash runs out. If they decide to take a world cruise or make a down payment on a new house with the money, they'd better be polishing their resume pronto.
Remember, a buyout doesn't only leave you with a lot of cash. It also leaves you without a job. That's not necessarily a bad thing though. In fact, that's the second positive of accepting a buyout.
Pro: The chance to embark on a new career
For workers who feel boxed in to their current career, a buyout may provide the opportunity to break away and move into a field they love. Buyout money can be used to pay for training or a new degree. It could also simply pay the bills while an individual is out on the job hunt.
Unfortunately, depending on the field, that job hunt could take a while.
Con: Finding a job may be tough
Individuals thinking they can accept a buyout, take a couple weeks off and then hop into new employment immediately may be surprised.
According to the Bureau of Labor Statistics, the average duration of unemployment in August was 31.7 weeks, or just about eight months. While 27 percent of workers find a new job within five weeks, the job hunt stretches to more than 27 weeks for nearly a third of the unemployed.
Workers taking a buyout may find they are up against stiff competition when it comes to finding new employment. Forbes reported in 2013 that any given job receives an average of 118 applications.
What's more, there's no telling what the economy will do in the future. Remember those 35,000 workers who took the 2006 buyout from GM? They lost their employment just in time for the Great Recession to hit the following year, not exactly an ideal time to be in the job market.
Pro: Early retirement, here you come!
Of course, if buyout participants can't find a new job, they could always retire early.
At age 59 1/2, you can begin pulling money from your 401(k) and IRAs without incurring any penalties. Then, at age 62, you can apply to begin receiving Social Security benefits. For older workers, the buyout money could bridge the gap and allow individuals to quit the daily grind for good.
Con: Early retirement could mean less Social Security
However, early retirement could mean you have less money to live on during your golden years.
For example, your Social Security will be a full 25 percent less if you start benefits at age 62 than if you wait until your full retirement age. If you were born in 1960 or later and start collecting at age 62, expect a 30 percent drop in your benefit amount.
Social Security may not be the only place your retirement funds suffer either. Exiting the workforce early means you have fewer years of savings in your 401(k) and IRAs. That said, some buyouts sweeten worker pensions and may offset the reduced savings.
That brings up to our next pro.
Pro: Your pension balance might get better
Depending on the terms of the buyout, your pension may get a parting boost as well.
For example, in 2013, GM offered a buyout to skilled and unskilled workers at various Michigan plants. The offer included an extra $10,000 toward worker pensions as well as a cash payout.
While a pension cushion can make a buyout more attractive, workers need to balance that positive with other perks they may lose by leaving early.
Con: Your health insurance costs might get worse
Of all the fringe benefits workers stand to lose when walking away from a job, health insurance may be the most costly. Unless you meet certain disability requirements, you aren't eligible for Medicare coverage until age 65.
If you're leaving a job that offers group health insurance coverage, you can likely continue that plan by paying the entire premium out of pocket. According to 2013 figures from the Kaiser Family Foundation, that option, known as COBRA health insurance, will likely set you back about $490 a month for single coverage or $1,362 a month for family coverage.
A cheaper option may be to buy insurance through a government health insurance marketplace. A Reuters report pegged the average monthly premium for a midlevel plan there at $328. Still, any way you slice it, health insurance is expensive and, without a job, you'll be paying for it.
Pro: Taking the buyout lets you leave on your terms
Finally, accepting a buyout lets you leave a job on your own terms. This may be the most motivating reason to accept a buyout if you're working for a company that's seen better days.
Accepting a buyout and walking away with your pride intact sure beats slinking out with a pink slip in your hand.
Con: Bonuses, vacation time and personal leave may get left behind
However, a buyout could mean you leave a lot of extras on the table. Before accepting an offer, workers should find out what happens to their personal leave and vacation days. Can they get paid for that time? If not, is there a way to use it up before accepting the buyout?
In addition, those receiving bonuses will want to check whether they lose that too or if it's possible to adjust the timing so they walk out with both the bonus and the buyout.
Have you ever been offered a buyout? Did you accept it and do you think that was the right decision? Share your experience in the comments below or on our Facebook page.