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 year).

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 a RULE!.

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.