The wooden bar shimmers with beer stains as I stubbornly try to wipe them away. Each jab of the napkin gets stuck, like a fly to Venus. Eventually I give up as my friend returns from the Thomas Crapper smiling.
“Sam, when I get my bonus this February, I will have hit my goal of saving $1,000,000 in the bank!” said my 38 year-old friend Paul over his Guinness. He went on to explain, “I’ve been saving my bonus every year for the past 16 years so that I can one day quit my job and do something more relaxing and fun.”
“Well done Paul!” I respond as I pat him on the back. “But what else are you going to do? Not many jobs in the world pay your type of income. Are you sure you’re willing to give it all up for a life of leisure?”
“Hmm, I don’t know Sam. I guess all I have to do is work another year, and I’ll get another $100,000 or so in bonus after tax. Maybe I should just continue to work?” questioned Paul.
“I think a lot of people would give up their left nut to receive a $100,000+ after tax bonus every year. Maybe you should think about taking a sabbatical instead to rejuvenate?” I replied.
“A sabbatical would be great! But, I think my company just demotes, underpays, or ultimately lays off people who take them,” explained Paul.
“Well isn’t getting let go exactly what you want? That way, you can get all your deferred compensation without a hitch!” I said.
“Good point! Time to kick back and get faded baby!” Paul cheered as we chugged our beers in unison.
MORE MONEY, MORE QUESTIONS
Paul is an account manager at a major software company. He joined the firm out of undergrad in 1996 and slowly rose through the ranks to become a “Vice President” of the firm. Paul likes his job, but doesn’t love it as the industry’s go-go days are over. Ever since the 2008 downturn, Paul no longer feels proud to work at his firm or in his industry. He feels constantly assailed by politicians and people who think making over than $200,000 is evil.
Paul’s job is to simply sell his company’s software and make sure his clients are satisfied with the product. Whenever new software company updates come up, it’s up to Paul to notify and up-sell those upgrades as well. Software sales is not a sexy job, but it pays very well. Paul has built friendships with his clients, often going out to dinner with their husbands or wives and attending the same charity functions.
INCOME GROWTH STALLS OUT
When Paul first joined his firm, he was making about $40,000-$60,000 a year for the first couple of years. In his third year, he got promoted to Associate and saw his base go up to $80,000 and his bonuses rise up to $100,000. In his 6th year at the age of 28, Paul was promoted to Account Manager and saw a base increase to $150,000 a year with bonuses up to $250,000. By age 31, Paul got another promotion to Vice President with a new base salary of $200,000 and bonuses that could go as high as $500,000.
Paul has been a Vice President for seven years now and saw a 50% slash in his 2011 bonus to $250,000 because of a 70% decline in his company’s earnings. Paul isn’t delusional, and recognizes that making $500,000 a year is still an incredible amount of money. However, a part of him wonders,”why bother” working hard anymore given his pay is no longer based on merit, but on the overall health of his company, which he has no control over.
One of his buddies a couple years ago gave him a dose of reality, “Paul, software sales is a bullshit job and you know it. Don’t you want to do something else more meaningful with your life?” Paul has been thinking about this statement ever since.
PROGRESS IS HAPPINESS
If ever there was a case that proved “progress” is more important for happiness than “money”, this would be it. For the years that I’ve known Paul, he’s been on the up and up. I love him for his frugality. He drives an 8 year old Honda Accord, buys clothes from Macy’s only on sale, and looks like just another regular guy. I also like Paul for his generosity, always fighting tooth and nail to pay whenever we go out to eat or drink. It’s just in his nature, and I’ve had to resort to paying while he goes to the restroom or is distracted with a pretty waitress.
Now that Paul’s income is no longer rising at a steady clip, he’s starting to lose interest in his job, yes even with his large income. Paul enjoys working with his clients, but there’s this deep nagging feeling that he could be doing something different with his life. Paul has always wanted to be an entrepreneur, but when he graduated, his firm gave him a job offer he couldn’t refuse. As a result, all of Paul’s entrepreneurial dreams have been put on hold.
Paul told me that when he first started working for his software company he vowed to quit his job once he saved $1,000,000 cash in the bank. Now that he has, he doesn’t know what to do. For the past 16 years, Paul has only done one thing, and that’s sell. Like Lyndon in “The Curse Of Making Too Much Money And Not Pursing Your Dreams,” Paul enjoys photography, but doesn’t have the skill to become a professional. Like me, Paul enjoys to write, but I don’t know if he will have the discipline to write constantly and live off peanuts as he makes a name for himself online or never in the publishing world.
Maybe Paul is entering a mid-life crisis and just needs a nice new Porsche 911 Turbo? The fact of the matter is that after 16 years, Paul is bored.
HOW MUCH DOES IT TAKE TO LIVE FINANCIALLY FREE?
With $1,000,000 spread across several banks at age 38, I consider Paul to be wealthy. His wife has a stable job and makes around $100,000 a year. The $1,000,000 in the bank is only the liquid portion of his wealth. He also has about $450,000 in his 401K, $500,000 in deferred compensation, and around $800,000-$1,100,000 in real estate equity from multiple properties. In other words, his net worth is around $3 million dollars.
If Paul quits his job, his roughly $10,000 (base) to $30,000 a month (base + bonus) in after tax income goes out the window. He also loses $500,000 in deferred compensation that vests over 3 years if Paul can’t successful be laid off, as opposed to quitting or getting fired. Paul doesn’t have to worry about health care because he’ll just go on his wife’s plan. However, what’s the fun in having so much free time if he can’t spend it with her, Paul wonders.
Suggestions for those who want to quit their jobs:
* Calculate your cash burn: Paul’s total monthly expenses is around $6,000, a frugal amount considering his $10,000-$30,000 monthly after tax income. Hence, with $1 million cash in the bank, he is covered for 167 weeks or roughly 14 years. If Paul were to sell his house and free up $400,000-$500,000 in equity and reduce his total monthly expenditure to $4,000 a month, he’ll have 350 months of living expenses equaling 30 years.
* Calculate your total non day job income: Paul generates about $3,000 a month from his cash savings in the form of various 3.5-4% long-term CDs he’s taken out. Furthermore, if Paul is able to be let go by his firm, he will receive his $500,000 in deferred income over 3 years at roughly $165,000 gross a year. If Paul maintains his $6,000 monthly expenditure, he should have no problem living worry-free for at least 3 years without having to drawn down any of his $1 million in principal.
* List out all your plans. After calculating all your passive income, you’ve got to come up with a list of things you’d like to do that will hopefully make you money. It is a blessing to do what you love and earn a living at the same time. Unfortunately, few people have this terrific combination. Given Paul has saved religiously for the past 16 years, he can now seek to do something he truly wants to do, and not worry so much about the income anymore. Paul lists: working with disabled children, working for UNICEF, teaching, starting his own financial advisory practice, working as an animal trainer at the zoo, and writing for a travel magazine as his ideal jobs.
* Investigate what the potential income is for your new endeavors. I can tell from Paul’s list that the most he’ll make is probably $40,000-$50,000 a year, except for his own business, which could be infinite. If we add up Paul’s $3,000 a month in guaranteed passive income + $3,000-$4,000 a month in likely salary from what Paul really wants to do, he can’t cover his $6,000 monthly expenditure without drawing from his savings, since it takes $8,000-$9,000 in gross income to spend $6,000. As a result, Paul needs to either downgrade his living standards, save more, or make more.
* Think about family. Paul and his wife (33) currently do not have children. They aren’t sure whether they do want children but will seriously think about kids over the next 3 years. A child could literally mean a 10-20 year difference between when one can retire! With education costs soaring out of control, one could very easily spend $500,000+ on their child through college. Granted, many families live on much less for their kids, but Paul is conservative and would rather have more money than less money for his kids. If Paul and his wife do have a child, his wife has to keep on working while Paul takes care of the child or vice versa.
* Put it all in a spreadsheet. It’s easy to talk through the income and expenses, however you need to build a spreadsheet with every single line item to make sure you aren’t missing anything. The last thing you want to do is quit your job and find out you forgot about that pesky $500 a month student loan bill! After you’ve put everything in a spreadsheet, discount your income by 10% and increase your expenses by another 10% to add an extra layer of conservativeness.
* Check out the charts. The following chart is my recommended savings rate and amount one should have at various stages of their working lives. The number where I would comfortably say you can quit your job and do anything you want without any fear of going into poverty is around $3,000,000 in liquid savings, as that will throw off at least $60,000 a year in interest income at 2%. For others, it may be more or less. It depends on your lifestyle.
* Will a long vacation or sabbatical do the trick? If you work at a reputable firm and have been there long enough, the firm should have a sabbatical policy. Paul’s firm allows up to a three month, full salary sabbatical for every 10 years he works at his company. Since he’s been there for 16 years, he’s well over due. A sabbatical will likely affect your compensation, but it’s a small price to pay for 3 months of bliss don’t you think? Well, it depends on how much you make. Ironically, the less you make, the better the sabbatical! There is a dark side to early retirement which everyone needs to read.
THERE NEVER SEEMS TO BE ENOUGH
Despite Paul’s hefty savings and assets, Paul still has doubts on whether he should call it quits in his lucrative career and become an entrepreneur that might pay nothing for years. Even if he joined a non-profit organization that pays $50,000 a year, he wonders if he will get tired of the bureaucracy and not be able to adjust to the pay . His promise 16 years ago of quitting once he hit $1,000,000 in savings now looks suspect.
We can do all the analysis we want and probably still not be able to make a 100% certain decision on how much one needs to save to quit their jobs. I have a feeling the answer is different for everybody. The real questions we should all be asking are: What do we plan to do once we quit our jobs? What are the alternatives? And what are our skills and interests that will allow for a rewarding experience?
The way I see it, here are Paul’s best choices:
1) Figure out how to be included in the next round of layoffs so Paul doesn’t lose his $500,000 in deferred compensation. Furthermore, Paul gets 2 weeks of severance for every year he’s worked plus a minimum 4 weeks bonus and all his accrued vacation days paid. We’re talking around 40 weeks of severance plus $168,000 a year for 3 years in deferred compensation as Paul figures out his next path.
2) Continue working at his job, but take it down a notch so that he’s doing just enough to stay employed, but not enough to feel frustrated if he doesn’t land that big client or fails to get recognized for good work. This is the safest route which will allow him to continue to bank $100,000+ bonus checks, earn his $200,000 base salary and provide for his future family if he so decides.
3) Take it easy at his job and seriously develop his side business until it generates an amount equal to 50-100% of his $200,000 base salary. This might take years, and could be accelerated if Paul decides to dedicate his efforts full-time on his side business. But, how many people on earth can develop a side business that generates $100,000-$200,000 if they are working full-time? Let’s be honest here. $10,000-$20,000 sure… but 10X that?
4) Take a sabbatical for 1-3 months to recharge. Paul still gets to earn his $200,000 base salary while he’s away, and maybe when he returns, he’ll realize just how much he enjoys his job. He could use the 1-3 months to develop his business idea as well.
5) The worst choice is quitting his job, losing his $500,000 in deferred compensation and severance and having no side business up and running. This move would be done out of anxiety, but a promise kept 16 years ago.
Bartender! One more round of Guinness for the both of us please!
To discover how to negotiate a severance package, click the banner. I managed to negotiate six years worth of living expenses and full health care when I engineered my departure!
Photo: Reading Entrepreneur Magazine On The Beach. Sam.