All That Glitters Is Not Gold | Golden Handcuffs
You may have come across the term, Golden Parachute (which seems odd because if you are jumping out of an airplane, a parachute composed of a heavy metal would not be my recommended descent aid of choice).
However in the world of business, a Golden Parachute is something to strive for, as it essentially is a large financial compensation package that a top executive receives if he or she is dismissed (typically if there is a corporate takeover or merger).
These financial incentives can be quite substantial (in the 9 figure range) setting up that individual for life.
So what are Golden Handcuffs?
Golden Handcuffs are essentially incentives that can be offered by employers and designed to increase employee retention.
They typically require a certain milestone to be reached before an employee has access to the benefits (which can be on a graduated scale or a all-or-none scenario).
Many workers do have Golden Handcuffs in place without even realizing it.
A common example is the time required for an employee to be vested in a 401k Employer Match or profit sharing plan.
In my particular case it is on a graduated scale:
- <2 years: 0% vested
- 2-3 years: 20% vested
- 3-4 years: 40% vested
- 4-5 years: 60% vested
- 5-6 years: 80% vested
- > 6 years: fully vested
If an employee leaves before becoming fully vested, he or she gives up the right to the non-vested component of the Employer Match/Profit Sharing value.
Often these golden handcuffs have no meaningful impact to a worker as the typical length of employment more than qualifies for these benefits.
But there is a certain group of individuals that these Golden Handcuffs can create certain dilemmas.
That’s right, the group I consider myself to be a member of, the Financial Independence/Retire Early (FIRE) Group.
An individual in the FIRE group can find him or herself at a crossroads when the decision to retire early becomes a viable option.
If this individual does not meet the time requirements dictated by the employer, he or she may be leaving valuable money/money equivalents on the table.
And thus one can find him or herself handcuffed to a job that they are no longer financially dependent to just to get the dangling carrot held out in front.
A decision tree has to be created to appropriately weigh the pros and cons of either scenario:
- Retiring early and forgoing the golden handcuff incentive.
- Continue working past your FIRE threshold in order to meet the minimum requirement for the incentive and then leave.
So what is a person to do?
Unfortunately there is no one correct answer that can be universally applied to everyone.
Personal Finance is personal and there are individual factors that can make one decision more appropriate than another.
What do I mean by that?
Well let’s say, for instance, you are employed in a company that will give full medical benefits to its retirees after x amount of years of work.
That is probably one of the biggest carrots out there (unfortunately it is becoming increasingly scarce to find)
If you have, or if there is a family history of, complicated medical issues, than it would greatly behoove you to continue working for this company until the time requirement is met.
I would venture to say that even if you are completely healthy and there is no concerning family history of medical illness it still would be wise to be handcuffed to this employer to gain this extremely valuable benefit.
It is estimated that the remaining lifetime medical cost for a couple in their 60s is over $250k.
With healthcare expenses exponentially growing, this will likely be even higher in the upcoming decades, only increasing the value of this carrot and making the golden handcuffs that much tighter.
Due to shorter time requirements, most employees, even those on the early retire path, can meet the vesting requirements for profit sharing/employer 401k match.
- Even if you were able to exit earlier than the full vesting period, it may be wise to work longer to remove these golden handcuffs as it will typically be under a 5 year commitment (of course it also depends on the actual amount of dollars from the match/profit sharing that would be left on the table whether you chose to forgo it or not).
In my situation, having already worked 12 years at my current job, I have removed the majority of my golden handcuffs, however one big one remains that causes me to keep assessing my situation.
Out of all my investments, the one I consider a home run was investing in the construction of my current office building in 2007.
As of the building’s last appraisal (April 2018), it has given me a 547% gain and currently provides annual distributions of $17,850/yr.
Under current bylaws, a shareowner in this entity has to surrender his or her shares within 5 years of retirement at the then market value.
If however a shareholder has served 20 years, this requirement is erased and the shares can be held indefinitely up until the time of death (where it would receive a step up in cost basis by the heirs who then have to immediately surrender them at current market value back to the group).
This is indeed a very enticing carrot to me as the thought of getting a pretty reliable source of income throughout my retirement of at least $17,850/yr (and likely much more down the road) would act almost like an annuity or second pension for me.
Also the step up in cost basis would save hundreds of thousands of dollars in capital gains tax alone if I choose to hold on to the investment till death.
Another consideration, and my biggest fear, is if I choose to leave before meeting this golden handcuff threshold is the following potential scenario:
Shortly after I surrender my shares, there is a buyout from an outside institution which would have made my shares far more valuable than my surrender value was, leaving others to profit instead of me.
In all likelihood the ability for me to FIRE will be 3-5 years earlier than this golden handcuff requirement.
A potential compromise I have already entertained is ramping down my hours to the minimum required for part time status benefits which would allow me to continue to accrue years of service to meet the handcuff requirement.