The golden handshake is a stipulation in a hiring contract which guarantees that the employer will provide a significant severance package if the employee loses their job. The package may include cash, stock options or other incentives such as extended medical benefits and so on.
This hefty severance package is most commonly offered to senior executives. Since such individuals often switch jobs on a regular basis, hopping from one prestigious position to another, the value of their name can be significant. However, because they move about so much they want to ensure that they leave a position in a financially beneficial position, since there may be a non-competition clause in their contract that keeps them out of work for a while.
Golden handshakes can amount to millions of dollars. They may be offered, even without being part of a contract, to encourage an employee to retire. When applied in this fashion they are more like a Golden Boot than a handshake. In this case retirement may not be optional, although you may end up with something to sweeten the experience.
If you are high enough on the corporate ladder to merit a golden handshake clause in your contract, read it carefully. There may be specific terms that require you to remain in your position for a minimum time period or that rescinds the offer if the company goes bankrupt. If you are being offered such an offer as incentive to retire, feel free to bargain for the best terms you can. Do so with care though, since the offer may be withdrawn if the company terms it too expensive.
Like so many other euphemisms, the Golden Boot sounds better than it is. The term is a polite way of saying that you have been offered an opportunity to leave your job, along with some nice incentives and benefits. Most commonly offered to an older employee, the Golden Boot can be a way for a company to avoid a lawsuit relating to age discrimination.
While the company may ask very nicely and provide you with extra financial incentives to leave, the long and the short of it is, you are being dismissed. How significant the benefits are should affect your willingness to consider the offer.
There are many reasons why you may be offered a nice severance package if you are willing to leave prematurely. For example, a company may need to cut its workforce and letting older employees go without replacing them is a way to do so. Another reason may be that they want to cut salary costs, and younger employees have lower salaries.
Since the company can’t simply tell you that they are letting you go because you are too old or too expensive due to your experience (that would be age discrimination), they use the golden boot to get you to leave on your own. That is legal.
If you are put in this position your first move should be to consult with your financial advisor. You will need to figure out if you can afford to retire at this point, taking into consideration the incentives you are being offered. If the financial situation allows, this may be a good way to make the transition to retirement with something extra in your retirement fund.
Many companies offer their employees benefits that include a retirement plan. For that pension plan to be fully funded it has to have sufficient assets to provide for all the benefits owed to employees. That means that the plan has to be able to make all the anticipated disbursements when the time comes.
The administrator of the plan should be able to calculate the amount needed each year. This number will let him know if the pension plan is fiscally healthy and able to meet the demand. Since the plan is “fed” each year by employee contributions, that helps to ensure its financial stability. However, if those funds are used up immediately and there are none left to meet future needs the plan is not really fully funded.
There are reasons why a pension plan may be underfunded. Since most plans invest in stock, the vagaries of the market can cause significant losses to the holdings. Mergers may also create a situation where a pension plan is underfunded. Bankruptcy may completely deplete a plan although there is a government backed insurance plan for such situations. The best known underfunded pension plan is US Social Security.
Up to 40% of existing pension plans are currently fully funded; the rest are not. That means that individuals should be prepared for the possibility that they won’t be receiving what they think they will from their employer-based pension fund. In 2005 the US government allowed United Airlines to default on promises made regarding its pension plan. The result was that retirement pay was decreased by over 20% for some former employees.
Keep an eye on your company pension plan. If it is not fully funded on a regular basis make sure to invest as much as you can in your own retirement plans.
A rule of thumb used to help people determine the amount of funds to withdraw each year from their retirement accounts, the goal of the four percent rule is to allow retirees to enjoy a steady stream of income while leaving enough in their accounts so that the funds continue to grow. The 4% number has long been considered a reasonable rate of withdrawal, since the interest and dividends should be able to keep up with the disbursements.
Retirees who have a longer life expectancy may need to consider other percentages to ensure that they have the funds they need later in life. Medical costs and other age related expenses can increase as the years go by.
Taking into consideration the changes in the economic climate during the last few years, advisors are now recommending that people rethink the 4% figure. For some the figure is not flexible enough. Some suggest that 2% is a better target for a retirement withdrawal rate. Annuities may help solve the financial problems for some retirees.
The advantage of the 4% rule is that it is easy to calculate and helps people anticipate how much they need to have saved for retirement. For example, if a person plans to spend $50,000 per year on top of their expected fixed income sources, they need a portfolio of $1.25 million to support a 30 year retirement. ($50,000/.04). If the total available in the portfolio at the time of retirement is below the needed amount, adjustments to the standard of living will be necessary.
No matter how you view the 4% rule, it is only a guideline. The best way to prepare for your retirement effectively is to start early, save as much as possible and consult with a retirement specialist.
One of the ways you can opt to have to have a lump-sum distribution from a qualified pension and profit-sharing plan is called “forward averaging.” This method is a special tax treatment which is very different from the “income averaging” that was used many years ago.
The rules are complex, but essentially, this lump-sum distribution is one in which your whole balance is disbursed to you, or your beneficiaries at one time. This might occur because of your death, you have reached the age of 59 ½ or you have become disabled and are self-employed.
If you qualify for this kind of lump-sum tax treatment you have special tax rates that are made available to you, allowing you to save a considerable sum when compared to the normal taxes assessed in a lump-sum payout. You do this by averaging the taxes that should be paid on your qualified distribution over a 10-year period.
The ten year averaging method is available to anyone who has reached the age of 50 before January 1, 1986. The tax rate used, however, will be those from 1986, which happen to be higher than they are right now. Once this payment treatment is chosen, all distributions in the future must use the same treatment and it can only be used once in your lifetime.
Formulas for calculating how much you would receive under a forward averaging treatment are available online. There are several other options for how you want your assets distributed, and it is worth comparing them to find out which offers you the best results.