An employee buyout can lead to the best of times or the worst of times.
The worst: A client of certified financial planner David Berman who accepted a buyout from a pharmaceutical company at 56 is struggling. He expected to land another job in six months, but a year and a half later still hasn't found one. He burned through his severance and the only money left is his retirement account.
The best: "I've often seen a buyout provide a real kick in the pants for someone to make a career change they'd been contemplating anyway, or to relocate to another city they'd been considering before," said Berman, a principal of Berman McAleer Inc. in Timonium. "They receive money and time off to get their feet on the ground, so it is a great thing."
David Kudla, chief executive of Mainstay Capital Management in Grand Blanc, Mich., has counseled several hundred autoworkers facing buyouts. Kudla said personal circumstances such as age and amount received vary but the need for strategy is universal.
"The biggest mistake is to accept a buyout without first developing a comprehensive income and investment plan that realistically accounts for retirement risk," said Kudla, a fee-based adviser. "Basic assumptions are often wrong, or the individual hasn't really gone through the math."
The worker must make an informed decision on whether assets will be invested immediately or are needed for a cash reserve, he said.
Key financial factors faced by workers accepting buyouts, according to Kudla, are:
People overall are living longer, so accepting buyouts in one's 50s or early 60s might mean they'll spend as much time retired as they did in the work force. They must make sure their assets outlast them.
* Rising inflation
The cost of living, which has been kicking up lately, can greatly reduce long-term purchasing power. Yet too often it is underestimated in planning.
* Pension concerns
Not only are fewer companies offering traditional pension plans, but many existing plans have been experiencing serious financial trouble.
* Portfolio management
Individuals often either invest too conservatively and don't amass enough money to maintain their withdrawal rate, or they are too aggressive and lose significant money when the market takes a hit.
* Unrealistic withdrawals
Kudla considers an annual withdrawal rate of 4 percent to 5 percent realistic, yet too many people take out 10 percent a year. That means the money isn't going to last.
"Accepting a buyout most certainly involves redoing everything you've already done," Berman said. "Your overall investment plan and the income you draw off your portfolio are going to change."
Re-evaluate expenses such as travel habits and the gifts you give, he said. If you have children in college, figure where that money will now come from. Your new situation could also change the financial aid situation.
"Because a buyout can flood you with a wide range of emotions, we help people to focus on what is important for them and we do it in a structured way," said Malcolm Greenhill, a certified financial planner and president of Sterling Futures, in San Francisco. "Building a financial foundation is very important before you move on to numbers-crunching that will include cash-flow projections."
"While a buyout may seem like a lot of money, when a financial planner considers the lack of additional income or the tax implications, it may not seem like so much anymore," Greenhill said.
"The client may not want to work again, but if the financial planner says there isn't enough money in the buyout to do that, then part-time work will have to be considered."
Here are Greenhill's steps for a post-buyout game plan:
* Decide what you and your family want to do for the rest of your life. Ask how much these goals will realistically cost and how far the money you are receiving will go.
* Gather together all your financial information, including insurance policies and retirement accounts. Figure how much you actually spend each month.
* Run a cash-flow projection. In some cases, buyout money doesn't enter into the cash flow because you already saved enough. If you must start using buyout money immediately, put two years' worth of expenses in a money-market account. That way you'll avoid having to sell stock in a down market.
* Structure your post-buyout investments based on the cash flow.
A conservative plan for buyout money providing around 4 percent or 5 percent annually typically includes a bond fund. If you need to target a return of 7 percent or 8 percent, you'll have to take on more risk.
"It's not necessary to have a 100 percent probability that you'll have enough money through retirement, so most planners tell you a 75 percent to 85 percent probability level is acceptable," Greenhill said.
"Take time with all this," he advises, "because you need to reflect."
Andrew Leckey writes for Tribune Media Services.