Take a hard look at clients’ buyout offers

It's not breaking news that baby boomers are delaying retirement, hoping to hang on to their jobs — and income — for a few more years.

It’s not breaking news that baby boomers are delaying retirement, hoping to hang on to their jobs — and income — for a few more years. At the same time, there has been a rise in early-retirement buyout offers from employers trying to trim payrolls and reduce benefits obligations.

Whether buyouts are selective or voluntary, they aren’t easy to deal with and can strike fear in someone who had planned to continue working.

Financial advisers whose clients become buyout candidates must get involved in the decision-making process and help them think through the options. If advisers are rushed and don’t have the time to conduct a thorough evaluation of the buyout offer, problems can ensue, especially later if the client realizes that he or she doesn’t have enough income to manage retirement.

To assess a severance package properly, advisers should be sure that clients consider several factors:

Retirement income planning. A retiree’s cash flow situation must be on the checklist first and foremost. In this case, it is the adviser’s duty to explain the probability that once retired, the investor will never again be able to earn any substantial income. For all intents and purposes, the client has optimized his or her earnings potential.

This makes it of utmost importance for the adviser to evaluate accumulated retirement savings, which will be needed to meet the client’s living expenses, keeping in mind inflation and taxes.

If an adviser assumes that a retiree will go back to work part time, he or she must be realistic about how long the retiree wants or expects to work at that job. With this in mind, it would be wise to make a conservative adjustment for this additional income.

Future withdrawal rates. Advisers must make sure that their clients can live comfortably with a reasonable withdrawal rate from their retirement assets.

A “reasonable” rate might range anywhere from 4% to 6% of total retirement savings.

Keep in mind that retirees who are in their late 50s or early 60s and need more income than 4% or 5% of their portfolio value might want to consider declining the severance package or obtaining a more permanent second job once they have taken the package from their company.

Lifestyle changes. Today, most people given the option of a retirement severance package are leaving a job at which they have worked for many years. Making sure that the client is ready to change their lifestyle is a major element of the adviser’s obligation.

For most people, living off 4% to 5% of their portfolio will represent a dramatic change in lifestyle. Investors must be prepared to spend less money and change their habits and behaviors.

Creating a budget for the investor accepting a retirement buyout and not obtaining a second job is a must.

Making a decision. With all this information in hand, the adviser and client should be able to make informed and appropriate decisions about meeting the investor’s retirement needs. However, the client may still be uncertain.

In that case, the adviser must be sure to reiterate the advantages of declining a severance package. These include extended potential earnings, the continued accumulation of assets through employer retirement programs such as a 401(k) plan, and the benefits of waiting to retire until Social Security benefits kick in.

At the same time, advisers can’t ignore the possible consequences of turning down a buyout package. Disadvantages include a smaller lump-sum payout or other severance benefits at some future date because of the inevitable rise in interest rates, and the possibility of being laid off due to increasingly risky economic conditions.

No matter the outcome, being available during the decision-making process, evaluating the proposal and weighing the financial pros and cons are invaluable services to an indecisive client. A thorough evaluation of all retirement options should be made before any financial decisions are reached.

Not all severance packages and retirement goals are alike. Advisers who are aware of their clients’ goals, needs and interests are those who will successfully steer them through the retirement transition process.

Brandon Ross is a financial planner with LPL Financial who works as a senior vice president of Peak Capital Investment Services LLC and as a branch manager of Peak Capital-Texas.