Retirement Buyouts Done Right

Thousands of workers are being offered exit packages as their employers deal with an economic slowdown. So far this year, Delta Air Lines and the Big Three automakers have announced major buyout programs. Expect more to come, especially from companies in the finance and housing industries, said John Challenger of Challenger, Gray & Christmas, a Chicago out-placement firm.

If a buyout offer has your name on it, first decide when you want to retire. The severance package -- usually a couple of weeks' pay for each year of service -- may seem like a windfall. But will it push you across the retirement finish line, fund a job hunt or pay for training in a second career?

If your employer has a traditional pension plan, you may have to choose between a lump sum and a steady stream of pension payouts. The easiest way to determine which is the better deal is to figure out how much your monthly payout would be if you used the lump sum to buy an immediate annuity from an insurance company.

Compare prices at http://annuityshopper.com. For instance, a 60-year-old man who bought an immediate annuity for $100,000 would be guaranteed about $609 a month for the rest of his life. A woman in the same situation would receive $577 a month. (Payouts to women are smaller because their life expectancies are longer.)

If the monthly pension payout is more than the estimated annuity check, take the pension. Remember, investing a lump sum for the rest of your life can be difficult -- especially when low interest rates mean smaller annuity payments.

Health care is the linchpin of any early-retirement plan. Companies have restructured retiree medical benefits, which now cost retirees four to five times as much as active employees pay, said Dale Williams, a Newbury, Mass., financial adviser.

Under federal law, all former employees can continue their coverage for 18 months after leaving a job, but they must pay the entire cost (including the employer's share of the premium) plus a 2 percent administrative fee.

Healthy people who retire early can buy coverage on their own, but many early retirees with preexisting medical conditions struggle to find affordable insurance. To minimize the hassle, use an insurance broker to help you search, or go to http://www.ehealthinsurance.com.

If you're rejected by commercial insurers, you might qualify for coverage in a state-run, high-risk pool. Thirty-one states extend coverage to individuals who are otherwise uninsurable, although rates are usually higher than in the open market.