Intel has from time to time offered separation packages to eligible employees as an incentive to retire, or at least to transition out of Intel. The most recent widely offered package was the Early Retirement Program (ERP) which Intel offered to eligible employees in 2016. While it’s unusual for a package to be offered to such a large number of employees, as was the case with the ERP, the calculus for the employee considering such a package should be the same: How would taking this separation package affect my ability to achieve my objectives and goals?
Your review of the separation package should not be limited to a comparison of the financial benefits of staying at Intel vs. the benefits of leaving. Of course, the financial comparison is a huge factor, but all too often we see employees get lost in the weeds around health care costs, bonuses, SERMA, RSUs, tax efficiency, etc., and lose sight of what matters most—what these costs and benefits will allow them to do (or keep them from doing). Remember, money is a resource, most of which you’ve earned from the work you do. If you are offered a separation package, take these 4 steps to make a smart decision about what you’ve earned.
1. Identify and Write Down Your Objectives and Goals
Ultimately, you need to determine what you (and your spouse, if applicable) want to achieve so that you can determine whether or not taking a separation package will affect your ability to accomplish it. Identifying objectives and goal setting is a simple but crucial exercise and frankly, should be done prior to making any financial decision. (However, I recognize it often takes a big decision like this to force the process.)
We have previously written about how to identify and document financial objectives and goals and you can read more about that here, but two important reminders about identifying objectives:
- Make them SMART (Specific, Measurable, Attainable, Realistic and Time-bound), and
- Prioritize them — if you can’t do all of them, you’ll know which to cut first
My grandpa used to say to my grandma “know what you want, so you’ll be satisfied if you get it.” (She didn’t take well to him saying that, but I think his intention was in the right place).
2. Document Your Current Assets (In One Place)
Once you have documented what you are trying to achieve (your objectives and goals) the next step is understanding what assets you already have in place to achieve these. Having a clear understanding of what you have will allow you to evaluate the impact of additions that come from future work or from a separation package.
It is possible that you have assets that go beyond this list but we most commonly see the following:
- Intel 401(k)
- Intel Retirement Contribution Plan
- Intel Minimum Pension (for more on the minimum pension and how to quantify it click here)
- E*Trade Stock Account
- SERPLUS (Intel’s deferred compensation account)
- Expected SERMA Balance
- 401k’s from a prior employer
- Spouse’s Retirement Accounts
- You and Your Spouse’s IRAs (both traditional and Roth)
- Taxable Brokerage account
- Real Estate Assets (those you would use to support your lifestyle in retirement)
- Cash Accounts (Checking, Savings, CDs, etc.)
3. Create Two Comprehensive Future Cash Flows: One Where You Take The Package, One Where You Don’t
Creating comprehensive cash flows is probably the most difficult step I’m listing here. It’s difficult because to be useful, it needs to account for known future inflows and outflows. This will require you to make assumptions for items like Social Security, inflation, health care costs etc., and you will need to incorporate the objectives and goals you listed in Step 1. However, the work you put in here will be worth it, because to truly understand the trade-offs associated with taking or not taking a separation package, you have to understand the real time cash flow effects.
We most often see the following having the biggest impact when evaluating a separation package’s effect on cash flows:
- Current Age – Obviously, the younger you are the longer your assets will need to support you. Additionally, the farther you are from Medicare eligibility (age 65) the longer you may need to purchase health care on the open market, which is a large expense
- Taxes – An unfortunate side effect of the big payouts that come with separation packages can be paying more in taxes than you would have had the same payments been made over a longer period of time. Accelerated vesting of RSUs, payment of future bonuses and payment of future salary-not-yet-earned are all great benefits of a separation package. However, you will need a cash flow in place to help you understand the tax impact. The cash flow will allow you to make apples to apples (e., net of tax) comparisons
- Your Health Care Options – Many past separation packages came with health care benefits such as extended or paid-for COBRA coverage or increases to SERMA. These health care benefits also can heavily impact cash flows
4. Evaluate Whether the Assets You Listed in Step 2 can Support Each Cash Flow. If There is a Gap, Understand the Magnitude.
The final step is determining whether the separation package will allow you to achieve the objectives and goals identified in step 1 (and which are now accounted for in the cash flows you created in Step 3). At Cordant, we use Monte Carlo analysis, which is a probability analysis indicating the likelihood that assets can support cash flow over time given historical risk and return assumptions. Regardless of the method you use, the evaluation will need to tell you whether the separation package is enough.
Ideally, the assets you have accumulated and documented in Step 2 can support both cash flows, in which case the decision is easy: Do I want to keep working here or not?
But often that’s not the case. If you can’t support the future cash flow with the separation package alone, it doesn’t mean you turn down the package, go back to work and hope for the best. If you have completed these steps, you now have the tools in place to understand how much you need, and you will be able to answer these questions:
- What is the risk if I keep working but am laid off?
- If I can negotiate the package, what exactly do I need to get from those negotiations?
- How much do I need to make and how long do I need to work if I choose to take the package and work elsewhere?
Executing the 4 steps I have listed here will take a lot of work, but it is achievable and will help you make a smart financial decision if you are offered a separation package. If this isn’t work that you want to do yourself, please reach out and ask for help (because this is work that we love to do)!