What Is a Retirement Buyout?

Buyouts are most often offered to employees nearing retirement age.

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A retirement buyout is a form of early retirement package that employers occasionally offer workers. Typically, they are given to older workers already nearing retirement. Buyouts amount to compensation packages designed to provide incentives for employees to retire ahead of schedule. Companies often create retirement buyouts for older employees to reduce their payroll, removing those who have earned larger compensation packages because of their tenure and experience.

Voluntary or Forced

Retirement buyouts typically are voluntary, but they can be forced, too. In a voluntary retirement buyout, an organization offers compensation incentives to employees who have the option of taking or leaving the offer. The buyout offers might be tailored to specific employees, or they might be applied to any employee that fits a certain profile. The buyout offers might be available for only a short period of time, or they might be part of an ongoing program. Forced retirement buyouts are more akin to layoffs in that workers must accept the buyouts. However, the design of the buyout typically gives workers some of the benefits of retirement, including years of credit toward pension benefits, and the workers targeted are nearing retirement.

Financial Impact

The most significant potential benefit of a retirement buyout is the financial reward that accompanies it. Retirement buyouts tend to be generous because employers are hoping to persuade workers to accept payments and sacrifice future compensation. The size of a buyout offer's financial component typically is tied to a worker's years of experience at an organization. Compensation can come in the form of a lump sum or an annuity. The drawback is that workers have to give up the security and size of their current salary earlier than they likely had planned.

Health Insurance Implications

Organizations differ in the way that they handle health insurance coverage for retirement buyout candidates. Some organizations provide low-cost or no-cost health insurance as part of retirement buyout offers, extending coverage until the workers turn 65 years old and become eligible for Medicare, according to MyRetirementPaycheck.org, a website of the National Endowment for Financial Education. However, other organizations do not offer aid for health insurance costs in their buyout packages, creating a new financial burden for the retirees.

Layoff Risk

A retirement buyout offer might not make sense for some employees, but declining a retirement buyout carries a certain risk. In particular, retirement buyouts sometimes are strategic steps that a company takes when it is struggling and attempting to cut costs. The buyout offer could prove to be one of multiple workforce reduction steps. Retirement buyouts do not always precede a wider reduction in staff, but in some cases substantial retirement buyouts do precede layoffs. Workers, therefore, face the risk of turning town a retirement buyout offer that is superior to the severance package that comes with later layoffs.