In my career as a financial planner there have been several pendulum swings in attitudes, philosophies and even in the language we use.
Ten years ago, if someone mentioned "golden handcuffs," they would almost certainly be referring to some version of a deferred compensation arrangement for executives, a setup designed by companies to incentivize valuable employees to stay committed to their corporate role or risk forfeiting serious benefits.
The planning for those situations would be fairly standard: derisk, diversify and be tax-efficient in doing so.
But times change, and so do vocabularies.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.
More recently, golden handcuffs is a term used to describe not only deferred compensation but also a wide variety of factors and even personal decisions that keep people tied to their jobs.
These factors shift the retirement, tax and investment planning tactics needed to develop a sound financial plan to escape the new golden handcuffs and a key (often missing) planning tool to help professionals move toward freedom.
What are the new golden handcuffs?
Over time, we've identified four key examples of golden handcuffs affecting the current generation:
1. Flexible compensation packages. Equity comp vesting schedules and deferred compensation arrangements are familiar versions of golden handcuffs for executives.
The increasing use of equity compensation as part of total compensation packages, across the rungs of the corporate ladder, has also given rise to flex comp packages, which put more control in the hands of employees.
These setups let employees choose what percentage of their total pay they'd like to receive in cash vs company equity — some taking it even further, letting the employee choose between restricted stock units (RSUs) and stock options.
While billed as an employee benefit, flex comp puts the onus on the employee to understand the options and thoughtfully decide what actually suits their plan best.
It's not uncommon for us to hear from prospective clients right as they near "the buzzer" and feel lost making their flex-comp decisions. These elections take thoughtful planning in the context of your family's goals.
Comparing job offers is already very complex when equity is included, as employees try to prognosticate on future company equity values.
When the additional variable of "the power of choice" is added through flexible compensation, these new golden handcuffs begin to tighten, keeping workers in their current roles.
2. High cost-of-living job centers. Possibly the most often-cited source of golden handcuffs on popular forums like Reddit is the high (and rising) cost of living.
For professionals who have built successful careers in tech centers that tend to correlate to higher cost-of-living areas, it is a natural outcome of their career trajectory that they become tethered to jobs to maintain their lifestyle in that location.
Without purposefully developing a financial runway or a transition plan that includes a geographic move, there will be few paths toward increasing freedom even with a high income level.
For a time, during the pandemic, remote work seemed to offer the ideal path out through "geo-arbitrage," maintaining the income related to a high cost-of-living industry center but living in a low cost-of-living area.
More recently, though, we've heard from several clients that return-to-work mandates have threatened job loss for those who aren't willing (or able) to comply.
3. Single-income pressures. Similar to the above but spanning across geographies are the golden handcuffs that arise when a couple wants to shift from a dual- to a single-income household.
Regardless of the cost of living of your locale, couples who have let their personal expenses inflate may find themselves tied to being a dual-income household at a time when they wish they could drop to one.
In our conversations, this happens most often after having children or taking on caregiving responsibilities for aging parents leads to desiring a reduction in work hours for one partner.
Failing to control so-called "lifestyle creep" ahead of time means being cuffed to two incomes, unless significant lifestyle changes happen first (and for long enough) to develop a financial runway.
4. Career identity. The last version of the new golden handcuffs is an individual's tie to their own corporate career identity. This isn't a new experience among retirees, who often face their own version of an identity crisis as they move on from a lifelong career to a brand-new phase of life.
This phenomenon has found new life among younger professionals though, as performance of company stock has given many the ability to exchange money for freedom in theory while the link to corporate identity keeps them cuffed to their job in reality.
The financial ability to make a job change does not equate to the desire to make a job change, but the desire for change also doesn't equate to the mental preparedness to act.
The middle ground where the desire exists but your mind has not caught up to reality can feel messy and leave you feeling more stuck than you are on paper.
The missing tool: Cash-flow planning
Managing these new golden handcuffs can be complex, requiring a look at every area of your financial plan — from budget, to concentrated stock exposure, to the tax bills that come with high-income employment and equity sales.
There's one tool that is conspicuously absent in almost all plans that helps to shine a light on planning opportunities for people wearing the new golden handcuffs and it's surprisingly simple.
For people feeling stuck in their role, the most powerful planning tool is a 12- to 24-month cash-flow projection. In our firm we refer to this as "The Action Plan."
Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel (formerly known as Building Wealth), our free, twice-weekly newsletter.
After developing a sound long-term financial plan that shows you're heading in the right direction in regard to equity sales, distribution planning and tax planning, we zoom in to map out the actual moves happening over the next year.
It's a simple four-step process with an outsized impact:
1. Review and insert your current cash balance, the liquid funds you have to work with.
2. Then map out income from all sources and when they'll hit your bank account, whether it's employment income, stock sales, self-employment or rental income.
3. Include your expenses by month, going as detailed as you'd like, making sure to include regular living expenses as well as one-time expenses that may come out through the year. Don't forget to make sure that savings goals are included as "coming out" of your cash flow.
4. Lastly, review and include your expected tax payments above your company withholding from all sources. If you aren't up for creating your own tax projection, it's a great time to enlist the help of a professional to dial in that number.
A foundation for success
The end result of this process should be a balance sheet that shows the moves of money into and out of your family's economy while tracking the net income and expenses and future cash balance at the end of every month.
These variables give you the foundation to make successful corporate exit plans without feeling strapped for cash along the way.
Projecting this out lets you address flex-comp decisions, be alerted to cost-of-living issues, see the impact of a reduction in income and become familiar with your post-exit situation ahead of time.
There's no doubt that the bulk of both professional and DIY financial planning usually focuses on portfolio insights and investment management.
Failure to round out that picture with thoughtful distribution and tax planning means wealth is likely to be lost in making decisions around a corporate exit.
The bottom line: Failure to complement your financial plan with a cash-flow plan may leave you unable to escape the new golden handcuffs.
Related Content
- Why Company Stock May Be Riskier Than Employees Realize
- Three Steps to Weave Equity Compensation into Your Financial Plan
- 5 Things to Consider When Weighing a Job Change
- What to Do With Your 401(k) When You Leave Your Job
- I Changed Careers, and So Can You
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
How Prepaid Verizon Phone Service Works and When It's a Smart ChoiceExplore the differences between Verizon Prepaid and Verizon Postpaid plans—costs, perks, flexibility, and when going prepaid makes sense.
-
Child-Free Cruises Perfect For Your Retirement CelebrationHow to find a bespoke ocean or river vacation for adults. Many of these options are smaller, charming river cruises, expeditions, or niche experiences.
-
My First $1 Million: Biopharmaceutical Senior Manager, 45, MassachusettsEver wonder how someone who's made a million dollars or more did it? Kiplinger's My First $1 Million series uncovers the answers.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
Dow Adds 472 Points After September CPI: Stock Market TodayIBM and Advanced Micro Devices created tailwinds for the main indexes after scoring a major quantum-computing win.
