Boeing’s Voluntary Layoff and Early Retirement Packages: Not a “One-Size-Fits-All” Decision

Brian Lockett, CFP® and financial advisor Marc Knauss outline considerations for Boeing employees who have accepted a Voluntary Layoff (VLO) to help guide their next steps in retirement.

On April 27, Boeing announced that select employees are eligible to apply for a Voluntary Layoff (VLO) – effectively, a gateway to early retirement with the potential to help many sunset their careers with the aviation giant months or years ahead of schedule.

Now, thousands of individuals and families in our region are considering their next steps, and many feel like they’re facing more questions than answers.

At CWM, we have counseled dozens of Boeing employees and retirees over the years, helping them develop financial plans to support their ideas of living richly. We’ve recently been working with several who are considering the VLO and early retirement, helping them first navigate the big question: Can I afford to retire right now? You’ll find more about that in this companion blog post.

Determining it’s the right time to retire is just the beginning. For qualifying Boeing employees who decide to take the plunge, the question becomes: Should I take the pension in payments or roll over the lump sum into an IRA?

There is no one-size-fits-all solution – even across the clients CWM serves. To help understand the dynamics, let’s take a look at two different real-life scenarios we’ve recently helped our clients navigate. Please note that these scenarios are simplified to provide insight into these complexities. You will want to consult with a financial advisor before making a decision that is right for your own situation.

Voluntary Layoff and Early Retirement

First, a quick overview of Boeing’s VLO. Employees who are approved for a VLO will receive a lump sum payment equal to one week of pay for every year of service, up to 26 weeks. Since this is a layoff – not early retirement – individuals will still be eligible for unemployment benefits and can be rehired in the future.

Beyond the VLO, eligible employees can elect to start their retirement as early as the first day of the month following their layoff date. Individual early and standard retirement packages vary based on hire date and role at the company, as well as other factors. Most must decide between taking their pension in monthly payments or rolling it over as a lump sum into an IRA. If they opt to take payments, which payout option is best for their specific scenario?

Scenario A: The Monthly Payment

George and Karen, aged 62 and 60, have been married for 30 years. George is a longtime Boeing employee who originally planned to retire once he reached age 65, but instead chose to apply for the VLO and was approved. They are both in good health, and Karen has a family history indicative of living a long life.

In working with George and Karen, we considered many variables, including:

  • Health: Good health means longer life spans, which will require a retirement strategy that supports 20 to 30 years of living expenses. Our financial models show that if George takes the lump sum rollover option, it will likely run out within 20-25 years, assuming between a 4% and 5% average return and their anticipated cost of living. As part of our financial planning process, we’ve worked closely with George and Karen to map out realistic cost-of-living projections based in part on their budget history and the lifestyle they’d like to maintain. With Karen’s family living a long time, we have to assume that the money needs to last 30+ years, so taking it in payments makes more sense for them.
  • Spouse: Married couples often want to ensure that money will be left to the surviving spouse after one has passed. The survivor option through the monthly payment plan enables George to ensure that his pension would continue on to Karen if he were to predecease her. This scenario allows for the very real possibility that one spouse outlives the other.
  • Children: Many parents will also want to leave money to their children. In this case, since the couple does not have children, they can stick with the spousal survivor option through the payment plan.

Based on these factors, the monthly payment plan is a good fit for George and Karen. It is structured to support a long life, providing stable income throughout the entire duration of the couple’s retirement.

The main risk with this option is the erosion of purchasing power due to inflation, which our Brian Lockett refers to as retirement’s silent killer. The monthly payment amount is predetermined, meaning that it will not be adjusted over time. In 30 years, that money most likely will not buy what it buys today.

Given the current market and economic conditions, there is some risk that we will experience high inflation at some point within the next 30 years. Some even speculate that we could potentially see inflation levels like we experienced in the Jimmy Carter era as long-term consequences of the present economic environment and the COVID-19 stimulus package.

Although we can’t predict if this will occur, we can still be cognizant of the risks on the horizon and adjust financial strategies accordingly so that retirees are not completely reliant on fixed income. We’re recommending that George and Karen maintain a healthy portfolio in addition to the monthly Boeing pension payment and Social Security income, as safeguards against inflation. This approach will put them in the saddle, so to speak, with one foot in fixed income (Social Security and pension, which won’t change as the market drops or rises) and the other foot in a diversified portfolio (to protect against inflation).

What if George and Karen were to choose the lump sum instead? In that scenario, it’s very possible that the couple could outlive their money. Taking regular monthly withdrawals from the lump sum of $622,000, for example, would run out in about 14 years assuming no return, and 20-25 years assuming an average return of 4% or 5% respectively. Even with the risk of inflation, in our professional opinion the payment plan is the optimal option for George and Karen.

Scenario B: The Lump Sum

Mary is a 70-year-old widow with some health problems and family history of heart disease and stroke. Most of her family members have not lived past 85. Mary has designated her son, Kevin, as her sole beneficiary.

Mary will need to consider the following:

  • Health: Genetics and existing health concerns can impact a person’s life expectancy, thus reducing the need to stretch out money over an extended period of time. Mary has a number of health problems, and given how long her relatives typically live, she likely only needs this money to last about 12-15 years. The lump sum would be able to sufficiently cover this amount of time assuming a very modest return of only 2%, and will likely allow Mary a greater cumulative payout than if she had opted for the monthly plan.
  • Spouse: Since Mary is widowed, she will not need to take advantage of the pension’s spousal survivor option.
  • Children: With no spouse to leave her assets to, Mary is sure that she wants to give money to her son, Kevin. The lump sum enables Mary to receive her full amount now, use and invest it strategically, and leave the remainder to her child when she passes away.
  • Social Security: Since Mary has already extended her Social Security benefit to age 70, she will be receiving the maximum benefit, making her less reliant on income from the pension lump sum.

In this case, we recommend that Mary take the lump sum and roll it over to a self-directed IRA. This strategy will suit Mary’s needs, allowing her to pay for living expenses and then leave any remaining funds to Kevin upon her passing.

There are potential risks here, such as living longer than expected and paying for professional assisted living facilities. Mary is at higher risk of needing to pay for professional custodial care since she does not have a spouse to care for her. If she were to need professional care later in life, she would need to pay for an assisted living facility, the costs of which may be too high for the fixed monthly income of the Boeing pension to adequately fund. She would potentially need to sell her home or liquidate other assets to afford such care.

Should Mary opt for the monthly payout and pass away earlier than anticipated, she risks essentially “leaving money on the table” since the monthly payments would discontinue. By taking the lump sum payment, Mary may have the opportunity to leave her son a nice inheritance.

Other Considerations

As you can see, everyone’s situation is different. Many people may be tempted by the large shiny lump sum without realizing that the monthly plan could provide higher compensation in the long run. Of course, there are even more factors to consider, including:

  • Medical: Boeing will subsidize the first three months of the COBRA premium for employees who accept the VLO and opt to remain on the company’s health insurance plan. Certain employees will qualify for a pre-65 retiree medical plan, and others will decide to pursue a different health insurance plan through the private market. To decide which path makes the most sense for you and your family, you must consider any underlying health conditions and how often you’ll need to seek health care before you reach age 65.
  • Mortgage: If you still have a mortgage payment, what is the monthly cost in relation to your income? What about property taxes and home insurance? For many, housing costs may be the largest monthly expense, but they should still be less than one-third of your retirement income. You may consider options to lower this obligation in retirement, such as downsizing, refinancing, recasting, or even moving to a less expensive housing market.
  • Budgeting: A budget (or lack thereof) can completely derail a plan. It doesn’t matter how much money you have; it matters how much you spend. Our clients receive a specialized budget plan that outlines both fixed and fluctuating expenses, from daily expenses to travel.
  • Social Security: When should you start receiving payments? For some, it’s best to wait as long as possible in order to take advantage of the maximum benefit — but remember, you’ll have to live longer to see the benefits of waiting. And, while you wait, you’ll continue spending your own money, which eats into the amount you can leave to your children. However, in some cases, it may make sense to start early. One of our clients, a 62-year-old who started receiving Social Security right away, saw notable benefit due to a singular income and savings situation.

When the time comes to make an informed financial decision for yourself and your family, know that you don’t have to make the leap alone. At CWM, our financial advisors use advanced financial planning tools and years of experience to map out every “what if” scenario to help you make data-driven, holistic decisions, one step at a time.

If you or someone you know is interested in talking through the VLO and retirement options, please contact us online or at 425.778.6160 to schedule a free, no-obligation phone call.

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