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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.
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This sounds like a sweet deal. I would work part-time to reach the 20 year mark. It will fly by.
Thanks Hatton1. That’s probably my game plan too. There is something in the works that potentially may make this a moot point but until it happens I will have myself handcuffed.
If it were me, I would stay and meet the 20 year threshold. The extra benefits that come with this seem to be too good to pass up.
Congrats on making a wise investment.
I appreciate the comment and suggestion. It definitely seems like the most prudent thing to do (although working 3 more years after you don’t need to is a bit of a tough pill to swallow as I did experience burnout in the past). Dropping 1 day off a week has helped with that so maybe dropping even more when I truly hit my number might help be even more manageable
I would stay the 20 years and reap the rewards. Congrats on a great investment!
Staying would depend on how much I needed the money and how much I still enjoyed the part time work.
If you already have enough without then no need to wait around for something extra if the work is getting you down. The allure of more will always be there but it comes with the cost of trading your time for it….might not be worth it.
If there is still joy in the job then the 18k is quite a pretty bonus! I keep reading that part time work is rejuvenating to a career.
Thanks Kpeds for the input as always. I do think that the decision to cut down 1 day currently in my practice has extended my work life by a lot and staved off the flames of burnout just a little bit. I will have to research what the minimum hours at my work I could do and still qualify for medical benefits (which would be huge) and time accrued for that 20 year mark. If it requires say 2 or 3 days a week, that might be something not only manageable but also carry non-monetary benefits (we all have heard… Read more »
You have to crunch the numbers. lets say you invested 50K and it grew 500% it would be worth 250K. Lets say your 17k annuity payout over 30 years is 500K so that’s a value of 750K (plus any appreciation on the property, over 30 years that may be minimal). If you cash out the 250K and put it in the market for 30 years at 6% it would grow to 1.4M At 10% it would be 4M Maybe those handcuffs are just hand cuffs and not quite so golden. Not saynig it’s not a good deal just saying the… Read more »
Did not factor that in at all in my decision tree. You are right, it does take some shine off the gold. I mentioned in my reply to Hatton1 that it may end up being a moot point as there is something in the works that if goes through would take the golden handcuffs off the table. Won’t count that chicken till its hatched though.
I visited my friend at Google the other day. They have some nice golden handcuffs, er I mean perks. Unlimited snacks and drinks, cafeterias w/ different themes, ping pong table, foosball, massage, nap stations, dry cleaners, etc. Then I saw his desk which is not even a cubicle. It’s just a computer desk in a wide open room w/ a hundred other people squeezed together cheek by jowl. No one talking, everyone hunched over with headphones on. It reminded me of the Borg with all the beings plugged into the collective. Google knows how to use golden handcuffs, but I’d… Read more »
Thanks MD for the advice. Wow, that is a complete 180 of what I thought working at Google was like. I just heard all of the perks, but if it really is being packed in like the Borg (great reference by the way) that takes away from the perk.
No need to think of it as a negative. It’s an investment that has it natural growth timeframe that doesn’t seem unreasonable given the return %. You know my thoughts on framing and this is something that needs to be framed as a positive.
Thanks Dr Linus, love how you threw in your concept of framing. Yes can certainly make a positive frame for either scenario
I have basically continual handcuffs. Each set vests over four years and they give me more each year. I try not to think about what will happen when I pull the plug. Then again my employer vests it all if you retire. I wonder if I retire at 55 does it still count.
That is an interesting system. Never heard of continual vesting plateaus like that but probably retains more employees that way rather than giving 100% vesting after set period
I, too, would very likely plan to continue working the minimal amount of time to receive this lifetime payout & would cut back to the minimal amount of hours required to satisfy the requirements once I reached my FIRE #. Even after tax that sum will cover a large % of your healthcare premiums when you retire early. I have a somewhat similar situation in that I will reach my FIRE # in less than 6 years but may continue working the minimal amount of hours required to continue receiving employer health benefits.
Appreciate your thoughts on this ENT MD. I agree that if can scale back hours to the absolute minimum needed to accrue time and get health benefits that would be the best option. 3 days on and 4 days off would seem very manageable without too much risk of losing skills. Thanks for stopping by
You have your daughter to plan for. That’s the thing, it is very hard to stop working completely with kids who are not fully launched yet. That’s how it is for us anyways.
Maybe an all round win if you can get the health benefits as well as your golden handcuffs. Plus enjoy working part time and have ample reserve if your daughter has more expensive needs in the future.
Either way XRV, you are a bright guy. I bet you will know what to do regardless.
Thanks for the compliment Dr MB. I agree about having a child changes things quite a bit when considering any moves. I actually had been targeting age 53 as my goal to launch and used that particular age because it would coincide with when my daughter leaves for college. This original plan meant I would have had 18 yrs at my current job. Probably 2 more years of service to take off last handcuff would be reasonable and further pad the nest egg too.
I share the position that others have said about staying the course until 20. It’s all about having more options.
I appreciate the comment and thoughts. It probably is what I am going to do if I go to the part time route which I think will be very manageable and still let me continue to pad the nest egg at a great rate.
There could be the scenario if you move to such a job in 40’s (change of location and lured by good benefits and salary). You know that you’d have to be there into your 60’s to get your full promised pension. During that time what you can contribute to 401k as an employee is lower than you’d like to save. So the drive to stay the full 20 is high. The problem with planning to scale down hours to ride out time is that it might not be possible. I have seen situations where someone in early 60’s ask to… Read more »
That’s a great point about inability to scale down in some situations. If that was the case I don’t think I could last the required time to get full benefits.
I know a lot of ObGyn docs remove the OB part from their practice later on for the very reasons you stated.
I am fortunate that my specialty is a “shift type specialty” so there are more opportunities to rachet down a practice.
Congrats XRV! I also invested in the construction of our medical building during the downturn which turned out to be a great investment. Personal finance is personal but I would work part time til year 20. Take care.
Glad to see your investment is working out great too VP. I was very fortunate that I came into the practice at the right time and got in the ground floor. It can be risky for sure but the payoffs are much greater than those coming in later rounds
Restricted Stock Units (RSU’) get handed out every year adn they vest over three years. Talk about a perpetual handcuff. Once you reach that big vesting point, the business does well and you have to wait 3 more years. I am not complaining, just highlighting another handcuff.
That’s a great point. So every time you receive a new amount of RSU you can’t claim them for another 3 yrs? Or is it once you hit 3 yrs from the time from the first RSU lot that you can take everything? If that’s not the case then no matter what you will lose 3 yrs of stock when you leave.
Thanks for adding to the discussion