Published by Tyler Silverthorn, CFP®, Associate Wealth Advisor
GM recently announced that they are offering a voluntary severance program, which could be an interesting option depending on your age and how you feel about your career. But you’ll want to consider your options quickly because you don’t have much time to make up your mind: the deadline to submit is November 19. If enough people don’t volunteer by that time, GM has said they may need to move forward with involuntary severances.
But retiring early or making a career change is not a decision that should be made in haste. If you’re one of the 18,000 eligible employees – with service dates of Dec. 31, 2006, and earlier – here are five questions to consider before making a decision.
1. Can You Afford to Retire?
You may be thinking, “I wasn’t planning to retire, but with six months of severance and the uncertainty of being involuntary separated, I am considering taking the offer.”
These are fair thoughts, but you’ll want to make sure you know what you’re getting yourself into by retiring early.
Do you know what expenses you’ll face in retirement? Do you have enough saved to maintain your lifestyle while combating the erosion of spending power caused by inflation? These are important questions to consider.
Keep in mind, “voluntary severance” does not automatically equal “early retirement.” Anyone who has worked for GM since 2006 or before is eligible, so it’s available to plenty of people in their 30s and 40s. If retirement isn’t an option, but you’ve been considering a change in career, this could be the perfect opportunity to try something else.
One important note here: GM reserves the right to reject anyone’s offer to participate in the voluntary severance program, so even if you want to participate, there’s still a chance GM could turn you down.
2. What Should You Do with Your 401(k)?
GM employees who take the voluntary severance will have the option to keep your GM 401(k) at Fidelity or roll it over to an IRA. Of course there are pros and cons to both, so take some time to consider what makes the most sense for you.
Keeping your retirement savings within the 401(k) can help keep costs low, but it also means limited investment options. Transferring a 401(k) to an IRA is a tax-free transfer (if done properly) with far greater investments options. For example, with rising interest rates the flexibility of available investments within an IRA might help protect the funds better than the traditional bond mutual funds available within the 401(k). Consult your financial advisor before making a decision.
3. What Will You Do About Healthcare?
When your GM healthcare runs out depends on your employee classification. If you are taking early retirement, make sure you find out when your coverage ends and what your options are, namely:
- joining your spouse’s employer-sponsored health plan, or
- signing up for an individual policy.
One important note here: health insurance premiums are not deducted from severance pay, so you will need to pay the premium directly or lose coverage. Some additional things to keep in mind when making a decision regarding healthcare:
- Separated classified employees will be allowed a 31-day special election period to make changes to their healthcare elections upon separation.
- Classified employees who are not eligible to retire with GM contributions toward healthcare coverage at the date of separation will retain healthcare coverage for a maximum of six months, or the duration of the salary continuation payments.
- Classified employees who are eligible to retire with GM contributions toward healthcare at the date of separation will be placed immediately in the salaried retiree healthcare plan (subject to cost-sharing provisions) with coverage terminating immediately for any retiree or eligible dependent upon turning 65 and becoming eligible for Medicare.
4. Should You Take the Monthly or Lump Sum Pension?
If you have a pension with GM, you’ll need to choose how to receive it after you retire – as monthly income or a lump sum payout (which can be rolled over tax-free into an IRA account). Factors to consider in making this decision include your health and life expectancy, the age of your spouse and children, your desire to leave a legacy, and how much you have saved beyond the pension.
If you decide to receive your pension monthly instead of lump sum, you will further need to decide on how to receive your pension. Monthly pension payments have spousal continuation payment options: 100% Joint Life, 50%, single life, etc. Electing to have your pension amount continue in full to your spouse after you pass provides for the most income to your spouse; however, results in the lowest monthly payments.
5. If I take the early retirement, should I start Social Security benefits after the six months of severance pay?
This one only applies if you will be between the ages of 62 and 70 after your severance runs out. When you claim Social Security is a very important question and an early retirement doesn’t necessarily mean you should change your plans.
The longer you wait to claim, the more benefit you will receive. But, much like our discussion of the previous question, there are several factors to consider, including your health, life expectancy, savings, and more. Another factor to consider is taxes. Depending on your income up to 85% of your social security benefits is taxable. Tax planning does not stop when you retire. It is important to have an income strategy that coordinates your pension benefits, social security benefits, and required minimum distributions to manage taxes in retirement.
Consult with a financial professional before deciding to claim sooner than you originally planned. Contact us to schedule a complimentary meeting to review your options.
When Do You Need to Make Your Decision?
The timeline below outlines all the important dates to keep in mind. The first and most important date is the impending deadline to apply: this Monday, November 19, at noon.
Read on for more:
- October 31, 2018 – Voluntary Severance Program Announced
- November 19, 2018 – 12:00 noon deadline to complete and submit the Notice to Express Interest
- November 29, 2018 – Deadline for leadership to inform employees of approval or disapproval of employees’ interest in voluntary severance program
- November 29, 2018 – Earliest exit date for classified employees approved for voluntary severance
- December 17, 2018 – Deadline to submit signed Release. **If you do not submit a release by this date, you will be considered a quitting employee and will not receive any severance
- December 31,2018 – Earliest exit date for executives
- January 31, 2019 – Last day of employment for classified employees. Wages and benefits continue until last day of employment
- February 1, 2019 – Six-month severance begins for classified employees
- February 28, 2019 – Last day of employment for executives
- March 2019 – Executives receive lump sum severance payment consisting of the the greater of 12 months of base salary, plus 12 months of COBRA premiums or locally mandated severance
Still not sure what to do? Click here to schedule a complimentary meeting with a Stonebridge financial advisor.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.