Why I turned down a sweet early retirement offer
During the nineteen years I worked as a financial manager for the Fortune 100 phone company GTE, I lost tens of thousands of co-workers to downsizing and early retirement packages. Up until 1998, we had always been the predator buying up the assets of other companies and turning their employees loose.
In 1998 when the merger of Bell Atlantic and GTE was announced, the tables turned in a big way. Suddenly, we were the minnow being swallowed whole by the predatory fish. After the merger, the company was renamed Verizon which sort of places in perspective how big a deal this was. Verizon touches the lives of hundreds of millions of people every hour of every day.
It became clear early on the Bell Heads, as Ma Bell employees were affectionately known, were in charge and many, many functions would be relocated back east to New Jersey and New York. Texas is a pretty inexpensive place to live and offers a great place to raise a family. The severance packages recognized this and, while fair, they were not particularly generous. The executives were well aware there were not many former GTE employees in Texas interested in relocating anywhere and particularly to the east.
I was 44, had longed for early retirement for a long time and had been working toward that goal. Under the GTE defined benefit traditional retirement plan I was eligible for early retirement at 50 ½.
My pension would have had some penalties due to not having hit age 55, yet with significant assets saved in the company 401k plan and in my open purchase stock brokerage account, for me it could have worked.
Fed Up With the Big Company Crap
By the time the merger was announced I was already fed up with the typical big company crap and was looking for a change. I actually volunteered for the first round of early retirement layoffs. My position was deemed critical preventing me from grabbing that opportunity. When my boss finally did force me into the program in November 1998, I was taken by complete surprise - after all, I had been deemed “critical” months before!
Because I felt secure, during the period between the initial announcement and my layoff I had purchased a new home after living in the same place for twelve years. While we survived, the process of moving and then selling the new home after living in it six months was stressful and expensive. I suppose the signs were there and I should have seen it coming. That experience provided good insight into the value of contingency risk planning. Fortunately, we had not stretched our housing budget and bought at a good price allowing us to turn a small profit selling by owner.
Now that I had the package, which must have been over 200 pages, it was time to evaluate what it meant to me and my family. We wanted early retirement, but this was six years ahead of schedule. With the severance package's financial incentives and our liquid investments, would we be able to cover our expenses for the long-term?
Should I try to jump back into a large company, many of which were also reducing middle management ranks?
Would this be an opportunity to move somewhere else and take a less stressful more enjoyable position?
The questions raced through my mind and there were no ready answers. Every reaction to the layoff had complexities and effects that needed to be understood fully.
The Severance Plan
As severance plans of that time went, it was fairly generous - if not as lucrative as some offered by the company in prior years. The package was made up of three parts:
- Lump sum value of pension plan
- Severance pay
- Continued medical coverage
The unique aspect of this package was the combined severance pay and the lump sum from the pension plan was deposited in your 401k plan. This was both good and bad. In general, if you were not yet 59 ½, the money was out of immediate reach without penalty. I recognize there are special tax rules allowing access to a 401k without penalty if the participant is over 55 in certain circumstances and the IRS allows withdrawals through a rule 72(t) plan, but those circumstances are topics for a future post. In general. the funds are out of reach until age 59 ½.
There was an alternate option for receiving the combined lump sum pension and severance payment. The option was in the form of a monthly annuity payment based on the life expectancy for your particular age group. The plan gave you the opportunity to begin the payments immediately or defer them until your normal retirement age.
The lump sum value of my pension amount was calculated by the company actuaries to be $76,400, not that great after nineteen years as a manager. The rules, of course, allowed them to deeply discount the raw figure based on the difference between my age and the normal retirement age.
Severance was a two-part calculation. For the first ten years of service, you got 3.7% of the monthly average of your highest three years of pay. The second part gave you 4.7% of that same monthly figure for years beyond ten. That produced $89,300 in my case, approximately forty weeks pay.
Adding the two parts together gave you the total severance they would deposit in your 401k if you selected that option. For me, that was approximately $166 thousand.
The annuity option beginning immediately would have paid $850 monthly. The one hook where they had you over a barrel was you needed to sign a document giving up your right to sue the company for a list of items including age discrimination. If I didn’t sign the document it would have reduced my payment by $45 thousand; the annuity would have dropped to $620 monthly. There have been very few successful age discrimination cases brought by men in their forties. I actually met with an attorney, paid her $100 and followed her advice to take the offer.
Early Retirement versus Actually Retiring
Six months before I got my walking papers, a guy on my staff loaned me his copy of The Millionaire Next Door (<-- Affiliate link). He stopped in my office one morning and said: “Terry you’ve got to read this—it’s you!” I did read it and took the message to heart.
The one thing that stood out to me was that while mid-management and below corporate types could achieve the success of millionaire next door status; it was a rare person who successfully snagged that designation. Large corporations seemed designed to make you feel comfortable in your life. It’s all about being on successful teams and moving the ball forward. A continue blizzard of feel-good public affairs and human resources bull crap designed to keep employees focused on the task at hand.
When GTE bought Contel Telephone in the early 90s, I was on a team that was required to work six to seven days a week - ten to twelve hours a day - from early November through the end of the year on a complex merger plan combining the two companies. We got Thanksgiving and Christmas day off and that was about it. And the team was okay with that because we were fed the constant flow of feel-good feedback about how important the task was and what a great job we were doing.
Sure, a handful of favorites ended up with nice promotions out of the project, the rest of us got a certificate and a handshake.
In the phone company, nearly anytime someone got a promotion they would go out and celebrate by buying a new car. They’d get a ten thousand dollar raise and spend thirty thousand on a new vehicle. We’d all stand out in the parking lot and admire the new purchase as though making the intangible promotion tangible. Obviously, it’s a loser’s keep up with the Jones’ game. It is ingrained in the culture of many large corporations.
When I did a stint as an investment advisor peddling stocks and bonds I had a conversation with the manager of a large mutual fund. The last part of the call turned social so I asked him what he was doing for the weekend. He said, “I bought a lake house on Lake of the Ozarks, most of the managers here have weekend places there, so I guess I need to go out a buy boat this weekend.” Seriously, not only did he apparently buy a lake house because of peer pressure but he felt he needed to buy a boat as well - just to keep up.
The guy was making in the mid $400 thousand range with bonuses, my point being that the culture surrounding us daily influences our decisions no matter what our income, wealth or education level.
Including the total $166 thousand severance payout I would have had a little over $1 million in invested liquid assets to begin an early retirement at age 44. Relying on the well-researched 4% withdrawal rate popular at that time, I figured I could pay myself $40 to $45 thousand a year, adjust annually for inflation and never work again. That would be $65 to $70 thousand a year in 2018 CPI inflation-adjusted dollars.
Given my health care was being paid for by GTE for the better part of a year and the substantial savings I held outside of my retirement plans, I decided to give it a few months before making a decision to permanently escape the working world.
The time off was like a sabbatical and of huge value to me in arriving at a new place mentally. Being removed from the daily social cues and corporate messaging at the phone company was uplifting. I spent my days at the elementary school helping children in a reading program for struggling first graders, tinkering with my stock portfolio and networking with old colleagues from around the country. All of this was healthy and helped me recover emotionally from a job I didn’t care for in a company postured to continually downsize during the coming years.
Read more about the value of sabbaticals, or the lack thereof, here.
After a few months, I began to recognize that the stock market wasn’t going to go up for ever. The bull market had been exploding for nearly ten years by the time I was on sabbatical at the end of 1998. Day trading had become fashionable. I traded Dell Computer a dozen times in one day; buy on a dip and sell when it recovered half a point thirty minutes later.
I read about a portfolio manager who went into a Discount Tire shop and none of the staff was around. He went looking and found them in a back room huddled around a level-two trading screen day trading stocks! On CNBC the dot-com stocks were going up $50, $75, $100 a day—it seemed you couldn’t lose and it felt as though the entire country was day trading.
Having been schooled in financial planning at the University of Dallas and achieved the certified financial planner designation - I knew better. I was as excited about the market as the next guy and even did some day trading with a small portion of my portfolio, but I knew better. I knew that at some point the market would turn and it might very well end badly. It’s history, and now we all know what happened—an enormous multiyear bust two years later.
Retirement Preparedness – Understanding Risk
I was 44. Had I been single, I never would have gone back to work. Even with my wife, if we were completely on the same page regarding the risk level of not working at that relatively young age I could have seen myself taking the early retirement route.
I wrote about the topic of most very young early retirees having been highly paid professionals, single or married without kids here. The components of risk are much greater when your children are involved. If you’ve been fortunate enough to have them in good schools, most parents want to ensure that continues. And if your child wants to attend college, most parents would like to be able to help them fund those costs.
I could have lived in my car or a rundown RV if the world turned on me once retired - but, I couldn’t have lived with myself if my children were forced to live that way.
It all came down to a dirty little 4-letter word embracing concepts nearly impossible to assess and measure with any precision - risk.
I could not accept the future financial risk associated with leaving the workforce and over time likely losing most of my professional credentials; credentials that I wouldn’t have had the energy to re-earn at a future time. We don’t know what the future will hold, but we do know what we have now. You’ve heard of ‘A bird in the hand is worth two in the bush’, I’m sure. That’s really the essence of my decision. I knew with a new professional position making decent money my investments would grow and the risk of not being able to provide for my children would be mitigated. Sort of an insurance policy if you will; you wouldn’t go without insurance on your home, would you?
For me it was the same argument for my children and a job would provide the needed coverage.
After five months off I took a job with a small consulting firm in Colorado. I found the firm in my networking effort; it was run by a couple of guys I worked with at an international CPA firm fresh out of college in the late 70s. The money was 40% less, the cost of living was a bit higher, yet with our solid financial position, it met our needs. The stress and hours were more favorable to a healthy lifestyle as well.
Taking a pencil to paper or developing elaborate spreadsheets demonstrating you are ready for early retirement or any retirement for that matter is myopic. The financial aspect is a key building block but you won’t be able to solve the puzzle without taking a deep dive into your inner self. Recognizing that many computer wizards and math nerds lean toward the concept of early retirement planning, I’ll offer the following formula in closing:
FP x MP = RP
FP = Financial preparedness
MP= Mental preparedness
RP= Retirement preparedness
The point, of course, is two-fold, if either FP or MP equal zero (as in you haven’t considered the item) then RP is zero as well. Second, to maximize RP one must maximize both FP and MP.
Now that I’ve actually retired early, if you subscribe to pre-65 as early, I spend most of my time working on my writing projects including a half-completed novel, searching for a publisher for my book-length poetry manuscript of life in Priest Lake, Idaho, submitting poems for publication in journals and anthologies and posting the occasional poem or financial planning piece to my blog at northidahostories.com