How We Are Trapped by Golden Handcuffs

Image: Inozemtsev Konstantin/Shutterstock

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 an all-or-nothing 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:

  1. Retiring early and forgoing the golden handcuff incentive.
  2. 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, then 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 retirement 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).

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