- change ups
There is a growing stream of people leaving their workplace for the last time with a lump sum of cash and a huge question: What to do with it?
It’s not just government employees, either, although the news across the country is full of government downsizing from the federal level all the way down to the township. In late March, for example, the U.S. Postal Service announced it will offer $20,000 early retirement incentives to its eligible administrative staff as part of a strategy to cut costs, which includes closing seven district offices across the country.
There also appears to be more reorganizing going on in business, which often entails long-time employees accepting cash payments in return for giving up their jobs, according to Chad Zagel, a financial advisor at the Edward Jones Gaslight Village office in East Grand Rapids.
Economic cycles are a fact of life, and the recessions generally force companies to evaluate how they are doing business and how their cost structures can be improved, said Zagel, but he said there isn’t necessarily a surge of employee buy-outs during the recession itself, because corporations tend to lack the cash at that moment to do it gracefully.
Now the recession is clearly receding, and the surviving companies are leaner and more efficient — and a lot of the larger corporations are sitting on sizeable amounts of cash.
“That’s why you’re starting to hear about mergers and acquisitions — AT&T buying T-Mobile, for example. You’re starting to hear about dividends being increased: JPMorgan Chase, the financial company, just went back to being able to pay a dividend again,” said Zagel.
“You’re also seeing these buyouts because the companies are taking a look” at reorganizing, which often involves adding employees with new, in-demand skill sets and eliminating those with skill sets no longer required, said Zagel.
The buy-outs reflect companies with cash available “to take care of the people who have been loyal” to the company for many years, said Zagel. Often the buyout amounts are pegged to the individual’s salary, he said.
“I’m seeing everything from six months (of salary) to two years,” he said.
“It’s not like somebody says, ‘Here’s a million dollars. You’re all set.’ You didn’t just win the lotto, but you are given an opportunity, though,” he said.
The opportunity is to do something you’ve always wanted to do, so Zagel said he urges clients to “evaluate the opportunity and make sure you use it to the fullest and don’t squander it.”
What to do with the buyout money is directly tied to what the individual wants to do with the rest of his or her life.
Zagel said he is a “huge advocate” of urging the newly unemployed with buyout payments to avoid making quick decisions on their own and without consulting anyone. He said they should “get an advisor they trust, to be able to talk through these things, whether or not they have an idea to start a business or an idea for something completely different.”
Zagel noted that much of an individual’s purpose in life is tied to family or profession.
“All the money in the world doesn’t buy you happiness, right?” he said, so it’s important for individuals taking a job buyout to have a plan for how they will spend their time, a plan that matches their financial situation. What they have a passion for doing must be balanced by a realistic monthly budget.
Many older people leaving the work force still have pensions, some have savings, and of course, there is always social security for those age 62 or more. But there are often mortgage payments that still have to be made and other recurring expenses, not to mention pricey hobbies and pastimes the individual does not want to give up, such as golf and travel.
“They have to understand what their lifestyle is,” said Zagel.
He noted that a working person doesn’t spend much during the week. “You spend it on weekends,” he said. “When you’re not working, every day is a weekend, so you really have to understand what your budget is going to look like.”
As for investing that lump sum, the last couple of years have “been a difficult period, and people now are appropriately cautious,” Zagel said. On the other hand, he said, some people tell him they don’t mind “letting things bounce up and down.”
“That volatility can really be detrimental to somebody’s long-term plan, if they are drawing income” from the investment, said Zagel.
Certificates of deposit these days are “pretty frustrating,” noted Zagel.
FDIC-insured investments are made through a bank, and protect the investor up to a limit if the bank goes bankrupt. But there is a similar form of insurance for some non-bank investments.
“Organizations like (Edward Jones) have another kind of insurance behind the scenes with SIPC,” he said. “If Edward Jones goes bankrupt, SIPC guarantees that our investors will be protected, up to certain limits. Actually, a little bit higher than the FDIC.”
The Securities Investor Protection Corp. was created by Congress in 1970. According to the SIPC website, it is the U.S. investor's first line of defense in the event a brokerage firm fails, owing customer cash and securities that are missing from customer accounts. SIPC either acts as trustee or works with an independent court-appointed trustee in a brokerage insolvency case to recover funds. The law provides that customers of a failed brokerage firm receive all non-negotiable securities, such as stocks or bonds, that are already registered in their names or in the process of being registered. At the same time, funds from the SIPC reserve are available to satisfy the remaining claims of each customer, up to a maximum of $500,000, including a maximum of $100,000 on claims for cash.
If it is appropriate, said Zagel, a financial advisor may recommend investing the buyout cash in certain municipal bonds or corporate bonds, or shares in a mutual fund for a better interest rate.
Zagel said financial advisors are seeing some employers willing to delay buyout payments or stretch out payments in regular installments, to reduce the former employee’s tax liability.
According to Zagel, when asked what their passion is, many buyout people tell financial advisors that they have a plan for a business or second career that they expect will draw some income, even if it is less than what they were used to making.
“A lot of people are successful at it, but I think there are a lot of people, too, who don’t understand the risk that comes with owning a business,” he said. “A startup business tends to not make money right out of the gate, and I don’t know if everybody understands that very well.”
Working in a business allows the individual to “discover if they like doing the work versus running the business. Those are two very different things,” Zagel said.
“Some people out there get an idea in their head and jump right in. They have a passion for it. But I also don’t like people to jump into a shallow pool head-first, either. I like to really talk with clients so that they understand what will happen in a short term and long term, and what to do to protect them.”