High Tech Retirement:
The Future is Never
Once again it's that time of year when lions lay down with lambs, the pundits predict, the recalcitrants resolve. It's
the holiday season, which commands that reality be turned into fantasy, and the beginning of a new year, which bringsrejuvenated
hope for prosperity. What a confluence of feelings and events this year end period brings; merriment, remembrances from previous
365s... and the end of another tax year for individuals. That's right, it's tax time... Boogity - boogity - shoop!
So it's not surprising that it's also that time when the merchants of retirement savings plans start to beat the drums
earnestly about their tax deferred savings plans. With all the trappings of motherhood, these institutions sell the present
benefits of tax deferral and the future benefits of a nest egg which will most likely be taxed at a lower bracket.
No, this month's article isn't about the marketing of retirement accounts per se, but it is about the people who need their
benefit... YOU AND ME. After all, what's all our working in high tech about, but to someday enjoy the good life.
GLAMOUR AND GLITCHES
Welcome to the glamorous, real-time world of high tech; it's on-line, miniaturized, and artificially intelligent. We're
about computers, robots, space-shots, and stealth.
Opportunity abounds. And weekly, the Boston Globe scoops up $23,000/help wanted page from companies seeking "bright, aggressive
people to grow with us."But note that it never says "çò
Friends, there's more trouble in high tech paradise than the soft markets for its products and services. It's the attenuation
of an individual's retirement security due to the roller-coaster fortunes of high tech industries; to government regulations
which reward corporate retirement plans at the expense of individual plans; and to corporate thinking all together.
If you're throwing a party this holiday season and feel that the party is getting out of control, casually mingle with
the groups that normally coagulate and ask your high tech friends over 35 y.o. how many are vested in their current company's
retirement plan, or that of any former company's. The chilling question will silence most revelry.
Recently, I conducted such an audit of associates that have been a part of glamourous high tech. Of twelve, two were vested.
Of those vested, the retirement benefits were so meager that Chicken McNuggets would be an expensive dinner entre'. Again,
in recent interviews for agents, I asked the same questions, and received the same results.
Clearly, high tech is not built around gold watches for 25 years of service; it's a workplace that celebrates five years
of service with lasered logo pen sets because ten years is infinity. In general, five years of service in one high tech company
is an accomplishment; specific to selling, it's a miracle. And the consequences of this high mobility is that there are going
to be some very bright people merely collecting Social Security as they mature along with the industries.
RECOGNITION & REALIZATION
Since the probability of becoming vested with a high tech company is reduced, the question is "What can be done about it;
and how soon?"
First, it's time to recognize the unique nature of high tech, the people attracted to it, and that the compensation plans
which work in other industries do not work well in high tech. Next, it must be recognized that the federal government will
be the last to change the rules for corporate retirement systems which it prays will relieve the burdens on social security.
Third, it is necessary for the masses in high tech to realize that the financial glamour of this industry is in upfront money,
not long term stability (the exceptions arethe big scores that are well publicized). Fourth, it is necessary for these same
individuals to realize that there isnot only a readily available better way, but to ask for it. And fifth, it is necessary
for high tech companies to realize their increased attractiveness to high caliber individuals in providing the better way.
Nothing screws up retirement planning more than the word salary, for once it is paid to an employee who has no other form
of remuneration, that person is tracked onto a federally sanctioned individual retirement system which only allows the saving
of $2,000 tax free in an IRA --individual retirement account. Let the same individual be considered an independent agent who
submits an invoice for services rendered, then the federal law sanctions that individual to stash away 15%, up to $30,000
of his/her income in a Keogh Plan (a retirement plan for the self employed which must be established by the end of the tax
It's recognized that there are other retirement devices -- some of which have tax deferrals. However the purpose here is
to show how readily available a more secure high tech retirement could be with no window shopping or laws changed. For illustrative
purposes let's check out the difference on a 30 year old salesperson's annual income of $50,000.
As an XXXXXX, one could save $2,000 per year which would yield a $760 tax deferral (married filing jointly) by '84 tax
rates. Were everything to remain the same over the next thirty years until the salessperson retired at sixty, thisperson would
have accumulated at 10% interest $361,887 and would have not yet paid taxes on $22,800 of earned income.
Let's study the same person, not as an employee but as an XXXXX óáìåó áçåîô, same interest and tax rate. First, the annual
amount allowable for tax deferment would be up to 15% or $7,500 annually (we'll asume that savings this much is possible).
At the 38% tax bracket this amounts to a $2,850 tax deferral or $85,500 deferral over the thirty years. Likewise, the nest
egg instead of being $361,887 would be $1,266,604. However, $50,000 represents the low average of high tech sales compensation.
Let's play the numbers at $100,000 where the producers hover.
In this case, as an employee saving the allowable $2,000, all the numbers are the same except for the tax deferral which
has a thirty year value of $27,000 due to the higher tax bracket.
As an independent sales agent, the situation gets exciting: Total allowable tax deferred savings would equal $202,500
and the total accumulated nest egg would equal $2,714,152.
Charted it looks like this
Annual Amt Total $$$ Total Tax
Saved Saved Deferred
$50,000 as employee $ 2,000 $ 361,887 $ 22,800 as independent 7,500 1,266,604 85,500
$100,000 as employee 2,000 361,887 27,000
as independent 15,000 2,714,152 202,500
(All calculations assume one yearly contribution on January
1st. Simple interest at a fixed rate of 10% is computed at
the end of each calendar year. Figures shown assume no early
withdrawals and the tax rates discussed above).
Sure, there are other factors to consider such as workmans compensation -- it's dirt cheap for sales; unemployment insurance
-- it's only three percent; FICA -- it drops from a combined 50/50 contribution of 14+% to 11%; and benefits. But all
of these amounts currently paid by the employer can be negotiated in the independent agents rate and commissions.
Now I know that there are employers out there that are dusted by the idea of independent staffers and sales forces. Again,
it's because the word "salary" reeks havoc on logic. Employers love to figure out how to lock their employees into the corporation.
Somehow they seem to confuse an employee's loyalty with staying out of the rain by obtaining a salary; and staying out of
the rain with productivity.
Moreover employers perceive that controlling salaried employees (who have less take home and retirement benefits) is easier
than independents who (as you have seen above) have a heck more to I suppose that the reinforcement of such thoughts comes
from the State and the Federal governments which have promulgated the determination of an employee versus an independent agent.
They, too, directly relate such status to the degree of control the company has over the individual. In simplistic terms,
if the company can direct an employee to a time for appearance, hours to be worked etc, it has created an employer / employee
relationship. If it cannot, it hasn'tcreated the relationship and has instead created an independent relationship. The difference
can be so slight that it is a sound practice to always have a contract stating the nature of the relationship.
For example, if you were awarded a $150,000, $100,000 or even a $50,000 contract for independent services and knew that
there was an unwritten and/or unspoken expectation for your presence, would you thumb your nose at this unasked request. Hardly!
The Golden Rule, i.e., "those with the gold make the rules," works for employees as well as independents. That's why it's
Likewise, I didn't draft the tax rules; I'm just advocating that those in high tech play by them. Because at present the
rules are such that dollar-for-dollar, independent contractors have far greater retirement benefits than high earning counterpart
employees. Compounded with the low probability of vesting due to high tech mobility and with the want of a "roll-over" capability
from one corporate retirement program to another, they also enjoy far greater security.
It's time for parties to learn how playing by the rules is to both their benefits. Make this Resolution #1 for the New
Year and remember that one should never confuse making big bucks with retaining big bucks, or confuse security based upon
another's security as being secure.