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Would You Take GM’s Buyout Package? March 29, 2006

Last week, more than 120,000 hourly workers for General Motors and auto supplier Delphi were offered buyouts of up to $140,000. It’s tough to see such a large company having to cut so many workers.

If you took that offer, you’d have to give up retirement and health benefits. Given the choice, would you take a large payment and no benefits, or a smaller payment and continued health care coverage? $140,000 is no small sum, but it’s not an amount you can live off of, unless you are close to retirement. If you face such a choice, don’t underestimate the value of benefits because those costs will only go up over time. Consider tax implications too. If your buyout is considered severance pay, as opposed to a lump-sum pension payment, it will be taxed as ordinary income. That could push you into the next tax bracket, and the employer must withhold more tax, thus making the payout smaller than the stated number.

If you’re young, you have time on your side. If you’re able to put all the $140,000 in an interest bearing account such as ING Direct for 5 years with an interest rate of 4% compounded monthly, you’d end up with $170,939.52. That’s $6000 per year of income if you were able to get another job that pays for your living expenses. The problem with many of the GM workers is that getting another job is probably not that easy, since the US auto industry is not exactly booming. At my age (30s), I’d take it since I wouldn’t know if GM would cut me later without the buyout package.

So, would you take the buyout?

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