Making Cents: Voluntary redundancy offer - Should I consider it?

LAST week I was telling you about an individual who contacted me wondering whether he should apply for a voluntary redundancy offer from his employer.
And without spending too much time going back over his numbers, if you haven’t read the article all you need to know for this one is that if he does apply and is accepted, he’ll end up with a net after tax termination payment of €111,720.
But he couldn’t live off €111,720 forever either. He’s 40 and wants to return to work, so how much did he need to earn, what about his pension, his mortgage, what happens if he can’t get a job anytime soon?
These were all questions swirling around in his head, so I set about answering them for him.
And the first area we wanted to focus on was, how much he needed to earn if he left his current employer and joined a new one?
And that number was €70,000 gross per year.
You see based on his current monthly commitments/outgoings, this is the amount of income he needed to earn to hit breakeven each month. His current salary was €80,000 so he could earn €10,000 less because he was carrying a surplus each month.
And he could reduce that €70,000 number even further and bring it down to €61,000 if he wanted to and let me explain how.
He was carrying debt and had three loans that were costing him about €470 per month. If he repaid them in full, from the proceeds of the severance package, it would reduce the amount he needed to earn each year by about €9,000.
So, if he left his current employer he now knew he could consider roles that would pay 24% less than what he was currently earning.
And being able to earn €61,000 right now is fine but it doesn’t account for his future self, and I wanted to include what provisions he needed to factor in for when he was 65 and not working.
And when I did, the amount he needed to earn increased to €69,000 and he needed to earn this amount for two reasons.
The first reason had to do with his pension.
He had no idea what amount he needed to factor in for future pension contributions. He was a member of a Defined Benefit plan, so he never had to think about making contributions other than some years randomly putting some unneeded bonus money into AVC’s.

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I was able to work out from his current spending what his likely spending was going to be when he reached retirement age. And for him it was about €2,500 per month which was €35,000 gross per year.
When I factored in what the DB pension would pay him and what the state pension would pay him as well, together that would be about €29,500. Which meant there would be a deficit of €5,500 that needed to be bridged.
Which meant that he needed to personally contribute 6% of his new salary (and we knew that target number at a minimum was going to be €69,000) to a pension fund and if he did, the deficit would be made up and at age 65 he would be fine.
So, he didn’t have to second guess how much he needed to pay into a new pension after leaving his current employer, he now knew it had to be a minimum of €345 per month. He now also understood the rationale and logic behind this amount which was important.
Okay that’s the first reason why €61,000 had to become €69,000.
The second reason was related to his mortgage.
He owed €190,000 and had 23 years left to run on it.
I was able to show him that if he overpaid it by €200 each month he would reduce the term by six years years months, and that would save him €22,970 in interest payments and he would be mortgage free at age 57 rather than being 63 which is what would happen if he did nothing.
And if he followed through with this plan he could earn €13,000 less each year when he was 57 because he’d have no more mortgage payment.
And he should have been overpaying on their mortgage all the time whether he was exiting a company or not. He had a monthly surplus that he was doing nothing with, but he just didn’t know what impact an overpayment would have, and he never thought about it and nobody ever told him about it until now.
Anyway, going back to the amount they had to earn if left his current employer and it could be anyone of three numbers:
-€70,000 and don’t clear existing debt
-€61,000 and clear debt
-€69,000 and clear debt and overpay mortgage and account for future pension contributions he needed to make.
He didn’t know these numbers until we met and they certainly were going to help him make his decision about applying for voluntary redundancy. He now knew he could earn a whole lot less and from a financial perspective he’d still be fine and from a non-financial perspective it would also help with that work life balance he was looking for as well.
And equally what these numbers could also have discovered was that he could struggle to earn the income he needed and perhaps in the long run he would be better off staying with his employer, if he could that is.
Okay, the next number we were able to reveal to him was 52.
And that was the number of months he could be out of work for before he needed to return and earn an income again.
When I looked at his outgoings and his existing savings and that termination payment of €111,720, when you divided one into the other it showed he had an emergency fund in place that would last for four years four months.
And if he does leave his current employer I suspect he’ll be back working in three or four months because he’d be keen to return to work, but he doesn’t have to rush back either given that he had those savings to fall back on if he needed them.
And knowing he had that length of time in hand I’m sure would help with reducing his stress levels particularly after leaving a good paying job. It will also help him to not rush into a new role for the sake of earning an income either, because you don’t want to discover soon after that he’s not a fit for the new company or the company isn’t a fit for him.
So, it’s really important to know what deficit would exist from a cash flow perspective after leaving an employer because it informs you how long your savings would last before you need to return to work.
There was another number I revealed to him and it was €56.
And this was the amount he was overpaying on a mortgage protection policy he had in place which was assigned to his mortgage.
He had the wrong type of policy in place so we set about changing the policy for him, which we have already done.
And now the monthly mortgage overpayment of €200 is only going to cost him €144 in ‘new money’ because he can redirect what he was overpaying on this life policy to their mortgage instead.
There were other numbers I revealed to them regarding what he should do with some of that termination payment when he did return to work and it wasn’t needed. We spoke about the accounts that were best suited to him, how he can optimise that money and maximise returns but I didn’t get into too much detail here either because that would be getting ahead of ourselves because he hadn’t even applied for the voluntary redundancy package yet, but after our meeting and knowing all of these numbers, he was going to.
And he was going to apply with confidence because he knew what the outcome was going to be and how everything impacted his finances.
When he made initial contact, he wasn’t quite sure what questions to ask, and he thought success from our meeting would be knowing (a) how much tax he’d pay on his severance package (b) what to do with his pension fund after he left (nothing by the way) and (c) what should he do with his severance package.
But we were able to reveal some additional numbers that were bespoke to him that he may not have thought of asking or he may not have been able to work out and calculate by himself, but we were and it was important he could get someone who could bring all elements of his finances together in a meaningful way because there’s a lot to consider i.e. pension, redundancy lump sum, social welfare entitlements, how to manage monthly cash flow, how much do you need to earn etc.
Which is why I think having third party help is important because it can help people considering taking a voluntary redundancy package make rational, logical, unemotional, well thought out decisions about what their next steps should be.
The gentleman I happened to meet was going to apply and for him that initial shock of his company offering a voluntary redundancy package which appeared to be bad news happened to be very good news for him, and now that he knows his numbers he’s hoping he’ll be accepted.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie