By EILEEN AJ CONNELLY -- AP Personal Finance Writer
NEW YORK (AP) — It's an astounding number. Companies have cut a total of 1.9 million jobs this year, a number some economists say could climb to 3 million before the recession is over.
But not every job cut is the same. There are traditional layoffs, where you get the bad news in the morning and are told to clear out your desk by noon with a non-negotiated severance package.
In other cases, though, workers get a buyout offer. That often means a combination of a severance payment, and getting a lump sum payout of any pension benefits. In 2007, 55.3 million full-time workers age 21 to 64 participated in an employment-based pension or retirement plan, according to the Employee Benefit Research Institute.
While the prospect of a fat check may seem alluring, it is not the best choice for everyone. Before making the decision to take a buyout, workers need to carefully weigh a series of questions to assess their financial future.
Can you afford to take a buyout?
Buyouts are often referred to as early-retirement packages, yet financially that might not be possible.
One issue is that typically buyouts are offered to worker between 50 and 60 years old, said Mike Rubino, chief executive of Rubino Financial Group in Detroit. It's a time when most workers are earning the top salary of their career.
"Unless they have a specialized set of knowledge, they're going to be hard pressed to find a job that's going to pay them as much as they were earning," Rubino said. So if the buyout check isn't large enough, they can be in a tenuous situation as they look for work.
A typical buyout check would average between $300,000 and $500,000, according to Joseph R. Birkofer, a principal at Legacy Asset Management in Houston. That may sound like a lot of cash, but recognize that it may need to last for a decade or more.
How long will your payout last?
To determine if your payout is sufficient, you'll need to project its growth from investing, as well as factor in any other sources of income you may have. Advisers say you should assume you'll need at least 70 percent of your current salary to maintain your standard of living after retirement.
To calculate how much you could withdraw after investing your lump sum payout, first factor in the potential tax hit, said Tom Ochsenschlager, the American Institute of Certified Public Accountants' vice president for taxation. If your regular withholding rate is 25 percent, for example, taxes would cut a $400,000 buyout check down to $300,000. That amount, invested at an annual return of 6 percent, would allow a 55-year-old to withdraw just under $1,925 per month, or about $23,100 a year, until age 80.
If you think you'll live to 85, the withdrawal rate should drop to about $1,790 per month, or only $21,480 a year. That is likely not enough for most people to pay their fixed expenses for housing and so forth, and it doesn't account for inflation.
Ochsenschlager said some taxes may be avoided if the lump sum is rolled directly into an IRA, but that option would only be viable for someone who either doesn't need the money immediately, or is already 59 1/2 years old and eligible to begin IRA withdrawals. Early withdrawals are subject to both income tax and a penalty tax.
If you're at least 62, you can also start receiving Social Security benefits, but you'll get only 75 percent of your full benefit. That slice increases each month you wait, but doesn't reach 100 percent until at least age 66, depending on when you were born.
You can get an estimate of how much you'll receive at socialsecurity.gov, where you can also request a personalized Social Security statement.
What other considerations do you need to make?
Whether you're hoping to retire or find another job, before taking a buyout, you should weigh whether you're up to managing the money. If you don't think you have what it takes, Birkofer said it's important to find a financial adviser you trust. "You have to find an adviser who's willing to coach you and help train you if you don't have the training," he said.
Some people opt to purchase an annuity that will guarantee a monthly payout, as one way to manage a lump sum that needs to last for years. But Dan Keady, director of financial planning at TIAA-CREF, noted that annuities, unless they have built-in payment increases, don't protect against inflation. So if you opt for something that provides a set payout, you'll also need other assets like an IRA or mutual funds to provide flexibility.
"Everyone right now is risk averse," Keady said, acknowledging that the past year has taught investors hard lessons about risk. "But you do need inflation protection and longevity."
What' more, as Rubino points out, retiring in a bad market could be risky. "You need a strategy to make money in good times and bad," he said.
Still one overriding factor should be the health of the company and its pension plan. "A great portion of the S&P 500 companies are underfunded in their pensions, and if the market continues to be bad, that amount of underfunding will continue to be an issue," he noted. "If they do go out of business and their pensions are underfunded, the government is not going to make up that entire amount."
John Ehrhardt, a principal and consulting actuary for benefits consultant Milliman Inc., said most people would be covered by the federal Pension Benefit Guarantee Corp., but anyone expecting high benefit levels might get less than they planned if the company goes bankrupt.
Finally, a key issue not to overlook is to factor in the cost of healthcare. A recent study by EBRI found that the average 65-year-old man would need to have $122,000 in current savings available in order to have a 90 percent chance of being able to cover his health care costs in retirement.
Most people would likely lose their health care coverage in a buyout situation, said Keady, so the cost of extending work coverage through COBRA, buying private health insurance or the possibility of being added to your spouse's plan must also be part of the decision making process.
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By EILEEN AJ CONNELLY -- AP Personal Finance Writer