General Motors said last week it's offering up to $140,000 each in voluntary buyout packages to about 74,000 workers to reduce its work force, but the automotive industry isn't alone in such offers.
In the past few years, Southwest Airlines, the U.S. Defense Department and AT&T have all pitched buyout deals, according to Challenger, Gray & Christmas Inc., the Chicago-based outplacement firm.
"As a result of global competition and industry consolidation, many companies are extending early retirement incentives and severance packages to employees [to] rein in costs," said David Kudla, chief executive of Mainstay Capital Management LLC, a fee-only investment advisory firm in Grand Blanc, Mich.
Voluntary packages encourage highly paid (read: expensive) workers to move on. They also help companies avoid lawsuits when aiming at large groups of workers, many of them older. Workers generally sign an agreement before they get any money.
Companies "sweeten the pot basically to cut down on their litigation exposure," said John Challenger, chief executive of Challenger Gray & Christmas.
While the prospect of a big lump sum is enticing, workers must decide whether the benefits outweigh the risks. That decision is rarely easy. Here's what you need to consider if you receive such an offer:
1. Retirement risk
For would-be retirees, "the single biggest mistake is accepting a buyout without first developing a comprehensive income and investment plan that realistically accounts for retirement risk," Kudla said.
Often, "there's all this money, and people really didn't go through the planning process," Kudla said. "Five or 10 years after taking a buyout they realize they weren't ready. Because of that lack of planning, they're back in the work force, sometimes in a job they really don't want to be in."
Consider: Would the buyout lump sum plus your savings support your income needs throughout retirement? A 65-year-old man has a 50% chance of living to age 85 and a 65-year-old woman has a 50% chance of reaching age 88, Kudla said.
Don't forget inflation's effect on your expenses. A movie ticket cost $1.55 in 1970 and about $8.50 in 2005. Applying the same historical rate of inflation on that specific item to the next 35 years, your movie ticket will cost about $46 in 2040, Kudla said.
Similarly, a full-size car cost about $3,540 in 1970, about $25,380 in 2005 and, applying the same historical rate of inflation on that item, will cost more than $181,400 in 2040. For inflation rates on specific items to repeat history -- with the average rate of the previous 35 years matching the rate for the next 35 years -- is probably unlikely, but the numbers are a wake-up call nonetheless.
For would-be retirees, assessing a buyout offer "is more complicated than buying a house, and most people don't get practice at it," says Bill Hampel, chief economist with the Credit Union National Association. "This is something where a professional financial consultant can help you do the arithmetic."
2. Income shortfall
If you plan to find another job rather than retire, assess whether there's demand for your skills, how long it might take to find a job and what costs you'll incur to find a new job.
For instance, autoworkers may need to relocate, given the lackluster labor market in their area. If the buyout package won't make up for lost wages and costs, you may be better off rejecting the offer. Another tack: You could try negotiating a higher payout, but your success will depend largely on the company's particular situation.
"If it would be fairly easy to relatively quickly get a fairly similar job with a fairly similar salary, that makes it almost a no-brainer" to accept the buyout, Hampel said. Otherwise, run the numbers.
3. Health-care costs
Whether you plan to retire or continue working, health-care costs may be significant. Would-be retirees might try to negotiate some additional health-care benefits, and job-jumpers should assess whether their company can help negotiate individual coverage. While short-term COBRA coverage is available, it may run out before your job search is over.
4. Rejection risks
Workers can opt to reject the buyout offer and stay with the company. The risks are that you might get laid off later with no offer, or the company goes bankrupt.
Assess your prospects at the company, Challenger advises. If your prospects are strong, the company may happily keep you on.
"If you're very tied into the organization and you know lots of people like you, you're probably safer than if you're more anonymous," he said.
Rejecting a buyout offer can pay off: GM's current buyout package is more generous than the one it offered in 2006, including higher dollar amounts for some workers, plus the option to roll the lump-sum into a 401(k) or IRA, thus delaying a tax hit.
But there's no guarantee that the company will dig deeper into its pockets later, and the risk of rejecting a buyout is that you get laid off later without any buyout at all.
Also, don't forget to assess the company's financial strength. "If you think the company could go bankrupt later, you might want to take your money and run," Challenger said.
5. Fear-based decisions
A common mistake in rejecting a buyout is doing so out of fear.
"Most people have not done their homework. They are making decisions based on fear, not facts. They haven't sat down with a financial adviser and looked at the whole picture," said Andrea Kay, a Cincinnati-based career consultant and author.
"I cannot emphasize enough the importance of looking at the facts and not jumping to conclusions about what you're afraid of, 'that my whole life is gone,' 'that I will never have what I've had before,' 'that I'll end up working at McDonald's.' I hear that often," Kay said.
To avoid this problem, consider getting your financial life and career plans in order now, before difficult decisions arise -- whether a buyout offer or other situation.
"Always be ready for the next step because you don't know what could happen," Kay said. "You will gain security by honing new skills, looking at the talents you have, and knowing where you're going to go next. That's job security."
Finally, don't forget that this lump sum from your employer could help you make positive changes in your life. People often perceive buyout offers as "the end of their world," Kay said.
Instead, "this could be the chance to begin a new career, start that small business, work less, enjoy life more, with a financial cushion in place." End of Story
Andrea Coombes is MarketWatch's assistant personal finance editor, based in San Francisco.