Dreaming of a Buyout

The latest announcement by Ford to offer one of the most lucrative buyouts ever to 54,000 employees has me longing for such a deal. With the current state of Detroit’s big three auto industry, I am a little surprised that they are doing so much to help the employees – evidently they learned a few things about public relations and the backlash of pulling the rug out from loyal employees.

Ford is saying all the right things and doing a lot to help in this transition:
“We need to restructure, and it’s important to our business to do so,” said Joseph R. Hinrichs, Ford’s head of global manufacturing. “But we want to do it in the best way for our employees.”

As an employee, I especially approve of this statement:
“We always prefer for people to voluntarily leave and that’s why we put the energy and effort into this package of buyouts,” said Martin J. Mulloy, Ford’s vice president for labor affairs.

Back to my own reality, I am faced with a corporation that has taken a completely different route with very different results. In the past, buyouts were offered to encourage those close to retirement to move on. It worked well, as it was a voluntary program. It was not disruptive or threatening to the employees. But, the company complained that the “wrong” people were leaving. In other words, they couldn’t choose the people to be dismissed.

So, a new tactic was deployed under the veil of “compensation for performance.” We were informed that instead of merit increases being spread across the employee base like peanut butter, the better performers would be rewarded with more money and the lowest rated employees would receive zero raise. Since most of us believe we are above average employees, we all bought it.

Over several years, as times have gotten leaner, this has evolved into not just a zero, but a one way ticket out the door for the lowest rated employees. If this was a perfect world and fair was fair, this scheme would probably work, but unfortunately there is favoritism, old boy syndrome, subjective evaluations and personality conflicts that determine the bottom 10% of the base. It has created animosity, distrust, and suspicious employees. Not to mention all of the lost work time as a result of the numerous watercooler discussions concerning this policy.

This approach of weeding out employees would be more effective in situations where each employee’s work productivity could be measured. For instance: a salesman who completes a finite number of sales for a quantifiable amount in sales. Forcing engineering into such a metric is a mistake, as sometimes the most valuable person in the room is the one who knows the right question to ask, or the one who thinks differently, out of the box, thereby providing another perspective on a problem.

So at this time, to my chagrin, buyouts are not on the table and probably will not be for quite awhile. The cycle will turn at some point, when management finally realizes the damage that has been done to morale, but for now I can only dream of having a nice send-off in the form of a cash buyout.

For more personal finance stories please visit the Carnival of Personal Finance. This week's theme centers around facts about the homeless people in the US. My article "When are the peak earning years?" was included.

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Cross Over Point - Net Worth to Total Earnings

One of my financial cross over points is approaching.

What is a Cross Over Point?
Simply put, a cross over occurs when one entity exceeds another.

There are several different types of financial cross over points. One popular cross over concerns passive income as compared to expenses. For instance, once your passive income (non-wage income) crosses or exceeds your expenses, you are now making more money from your investments than you need to live. Ahhh, a signal of financial independence!

Another cross over point that I find interesting compares net worth to total earnings. Do you have any idea how much money you have earned in your life? Its probably more than you think. What if you had been able to save every penny that you ever earned? You would probably have a large sum. Obviously, we can’t do that as we must spend some to live. However, we can invest the money we save and it will grow to eventually catch up to our total earnings value.

Net Worth / Total Earnings Ratio
Out of curiosity, I decided to calculate the ratio of my net worth to total accumulated social security earnings. For my earnings, I used the official data provided to me by the Social Security Administration. Every year, the SSA sends each taxpayer a pamphlet that explains their SS benefit. It details the amounts already paid into the system and projects what your payout will be in the future. I added up my earnings from age 16 to present that were provided in the SSA pamphlet. For my net worth, I used the most current data that I had calculated for last month, November.

The ratio of my Net Worth to Total Earnings is 0.98. The cross over point is very close. In fact, it’s possible with a little Santa Claus rally that by the end of this year the crossing will occur for my final net worth calculation.

What does it mean?
As a comparison, some of my co-workers have worked just as long and earned just as much or more than I, yet their ratios are in the area of 0.2. Have they really spent that much more money than me? Not exactly. You have probably heard that a penny saved is a penny earned. Well, it goes even farther than that. When you make a purchase, not only are you spending that dollar, but also all of the future earnings from that dollar. So, when you trade away money it can no longer work for you. This underscores the importance of starting a nest egg, no matter how small, you have got to start the seed. The money I have saved, has been invested and has been working for me for a long time. And now its almost to the point where it will surpass my total lifetime earnings.

Metrics to evaluate Personal Finance Progress

I noticed on some other PFblogs several PF related ratios that are posted on the sidebar. Ratios are helpful as metrics or benchmarks – something to help measure your progress. It’s a great motivator and I can’t wait to run the numbers.

Savings to Income = S/I
If your interested in PF, you have probably calculated your net worth. If not, get out a spread sheet and start tallying up everything you own (exclude your home) and subtract all debt. Now take that number and divide by your total before tax income. For example, if you have a net worth of 500K and income of 100k, the ratio is 5. For reference, a rule of thumb often touted by Certified FPs is a S/I goal of 12 to begin retirement. The number 12 is based on a 5% withdrawal rate that would equate to an income that is 60% of your final salary. Add Social Security and/or pension benefits to that and you retire with approximately 80% of your final income. My S/I = 9.9. Lets try another one.

Debt/Income = D/I
I like this one, because I have no debt. My credit card is paid off every month, my truck is free and clear and I have paid off my mortgage ( we can argue the pros and cons about that later). So D/I = 0.

Savings Rate to Income = SR/I
This is a little bit sketchy because only pre-tax savings are to be included. For instance, add up any contributions to an IRA or 401(k) plus any company matching and divide by income.
IMHO, I think all savings should be included, even after tax savings. In fact, after tax or non sheltered savings are the key to early retirement. Having an over funded 401(k) that can not be utilized without penalty until you are age 59.5 is not going to help you retire in your 40’s. Including all savings increases my SR/I substantially to 59%.

Another useful ratio, Passive Income/Expenses = PI/E
Passive income includes income only from capital gain distributions and dividends. It excludes salary, capital appreciation, one time sales, etc. My PI/E = 95%.
My goal is to live off of passive income, only. Some margin is necessary to allow for variations in capital gains that are distributed based on fund performance, turnover, and other fund manager controlled activities.

And finally some Wealth accumulation ratios
A Wealth Accumulator or WA from the Millionaire Next Door is defined as a net worth that is equivalent to or greater than 10% of your salary * age. While PAW or prodigious accumulator of wealth is quantified as two * WA. Let’s calculate the WA value and then divide by net worth to get a WA or PAW ratio. When I first started tracking this metric 6 or 7 years ago, I was not quite to the PAW level. It gave me something to shoot for - a rabbit to chase. My current PAW ratio = 115%

I plan to incorporate these ratio calculations into my net worth spreadsheet. The spreadsheet is used to track my assets and their performances and is updated on a monthly basis.