Beware of the late term windfalls! We work and work to join “the club” as I have heard it called, the executive club that is, the folks that meet about meetings the folks that talk about talking, that take action about taking action, and that make loads more than the rest of us. Generally, we work our entire lives trying to get into the club and for most of us it never happens, and, believe it or not, that is a benefit!
Let me explain.
If you are on the executive track and in the club in your late 30’s early 40’s, then the executive track pays dividends. However if you are destined to become the high paid executive in your late 50’s, then your life might just get ruined.
Let me explain.
If you make the average wage of the American worker, 46K (according to ssa.gov), then your savings rate to replace that income is recommended to be about 10% from when you start working until the day you retire. Put into a simple calculator, running at a 6% annual return and inflation (including wage inflation) at 2.5% you end up with about 750k in the account. A great start to replacing the majority of your income. Now that we have that assumption lets assume that you receive a pay bump to an executive when you are 60, thus, you have about $500,000 currently in your retirement, making 46K a year, looking pretty good. That is until you get your bump, now you are making $150,000 / year, and you have $500,000 in retirement, not quite four years of retirement, your situation just went from ok to terrible!
When I bring this up to people everyone responds, well I would simply save 100,000 a year and keep living on what I was. Bull Hunkidory!
Let me explain.
If you make 46K a year you pay fed taxes of less than 10% or about $4300 if you make 150k a year you pay taxes of 20%, or about 31K once you go through the brackets. Thus by the percentage you pay double the taxes, and therefore even though you just tripled your wages, your tax liability went up 7x! Let alone you think you are going to get away with shopping at the thrift store as an executive, avoiding the dry cleaners by getting non-iron shirts, driving your ten y/o Honda? Generally NO many positions “in the club” require a certain keep up with the Jones’ attitude. Therefore your lifestyle changes from that of an average person, able to avoid the rat race of keeping up with the Jones’ shopping at thrift stores driving your 10 y/o Honda living in the home you purchased 25 years ago (oh wait a minute am I talking about the “millionaire next door”) just think about how good life could be if you simply hadn’t gotten that promotion!
Long story short, windfalls late career could easily have negative consequences to your retirement or lack thereof. The ol’ saying “you never know what is good and what is bad.”
Let me explain.
If you are on the executive track and in the club in your late 30’s early 40’s, then the executive track pays dividends. However if you are destined to become the high paid executive in your late 50’s, then your life might just get ruined.
Let me explain.
If you make the average wage of the American worker, 46K (according to ssa.gov), then your savings rate to replace that income is recommended to be about 10% from when you start working until the day you retire. Put into a simple calculator, running at a 6% annual return and inflation (including wage inflation) at 2.5% you end up with about 750k in the account. A great start to replacing the majority of your income. Now that we have that assumption lets assume that you receive a pay bump to an executive when you are 60, thus, you have about $500,000 currently in your retirement, making 46K a year, looking pretty good. That is until you get your bump, now you are making $150,000 / year, and you have $500,000 in retirement, not quite four years of retirement, your situation just went from ok to terrible!
When I bring this up to people everyone responds, well I would simply save 100,000 a year and keep living on what I was. Bull Hunkidory!
Let me explain.
If you make 46K a year you pay fed taxes of less than 10% or about $4300 if you make 150k a year you pay taxes of 20%, or about 31K once you go through the brackets. Thus by the percentage you pay double the taxes, and therefore even though you just tripled your wages, your tax liability went up 7x! Let alone you think you are going to get away with shopping at the thrift store as an executive, avoiding the dry cleaners by getting non-iron shirts, driving your ten y/o Honda? Generally NO many positions “in the club” require a certain keep up with the Jones’ attitude. Therefore your lifestyle changes from that of an average person, able to avoid the rat race of keeping up with the Jones’ shopping at thrift stores driving your 10 y/o Honda living in the home you purchased 25 years ago (oh wait a minute am I talking about the “millionaire next door”) just think about how good life could be if you simply hadn’t gotten that promotion!
Long story short, windfalls late career could easily have negative consequences to your retirement or lack thereof. The ol’ saying “you never know what is good and what is bad.”
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