Money Makeover: Couple face tough decision on buyout

Monday, May 18, 2009

Money Makeover: Couple face tough decision on buyout

Choice depends on reducing debt, getting a new mortgage and cutting spending

Brian J. O’Connor / Detroit News Finance Editor

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It’s the question thousands of Metro Detroit auto workers have faced and one that Brenda and Jason Hendricks face now, as the auto industry continues its massive and historic restructuring. Do they take a big, lump-sum buyout and move on, or hunker down and hope they can hang on to one of the vanishing high-paying, big-benefit hourly auto jobs?

Brenda is the higher earner for the Livonia couple, now that Jason has taken a pay cut at his chemical analyst job. Still, they make a very comfortable income, including some photography work by Brenda, with no dependents other than their two dogs.

• Account history: "I’ve been resisting a buyout for the past two years," says Brenda. The offer is a $75,000 lump sum plus a $25,000 car voucher with Chrysler covering taxes on the vehicle. Jason thinks she should take it, and it is tempting, Brenda says, "But we thought we should sit down with a planner and figure it all out."

The couple’s house has lost value, and although they don’t owe more on it than it’s worth today, they do have an interest-only mortgage that’s not paying down any of the loan balance. They have two car loans and contribute to 401(k) retirement plans at work. The surprise as they outlined their cash flow was that they’ve unconsciously piled up $18,000 in credit card debt.

"I didn’t know what our cards came to, and it’s kind of embarrassing," Brenda says.

First things first: Not that embarrassing, says certified financial planner Keith Southwick of StraitGate Financial in Novi. Brenda and Jason aren’t over the recommended debt-to-income levels of 28 percent for all housing costs (they’re well under at 13 percent) or the 36 percent ceiling for all debt (30 percent). But along with the fact that they can’t account for $1,750 in monthly spending, it is a sign that they need to track where their money goes each month, and aggressively trim their spending if they want to make any buyout money last until Brenda can start bringing in income home again.

"I look at this kind of like being a stress test for you guys," Southwick told them. "The question is, how long can you sustain yourselves after a buyout?"

Besides tracking spending, the couple have to contend with two other big buyout factors: the tax hit that comes with the lump sum of money and replacing Brenda’s health insurance, since both she and Jason are on her Chrysler benefits plan.

• What’s next: The taxes on Brenda’s buyout money will push up their taxes, phasing out a couple of hundred dollars in deductions on this year’s tax return, though they can offset some of that by adjusting withholding, since they got a large refund on their 2008 return.

They have two choices on benefits: extending Brenda’s plan for about $8,000 a year, or converting to Jason’s workplace plan, about $300 a month. Southwick also projected that future costs include selling one vehicle and retiring that loan, and moving to pay down credit card debt.

Depending on how much of their spending gap could really be saved, Brenda and Jason could get through the third quarter of 2011 by extending her health coverage, or all the way to the beginning of 2012 by converting to Jason’s benefits plan.

• Bottom line: With more than two years to put a public relations degree to work, launch a photography business or find other work, the buyout can make more sense than risking staying and being laid off, Southwick says — if Brenda and Jason get aggressive with tracking their spending and cutting back on expenses right now.

"You want to enter into this by being very frugal before you take the package," Southwick said.

"But don’t sell yourselves short — you can make it work."

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