How to Tell If You’re on Fast Track
Q: Whatever happened to that old rule of thumb that said if your salary matched your age you were doing pretty well on the job? Surely, that can’t still be true. Is there some new guideline to help us see where we stand in the job market? I am headed off to my high school reunion--if you catch my drift.-- C.R.
A: You’re right. Thanks to the rampant inflation of the early 1980s and a host of structural changes in how employees are paid, the salary-equals-age yardstick was shattered the better part of two decades ago. And since nothing is as simple as it once appeared, you shouldn’t be surprised to learn that the old measurement has not been replaced by anything quite as simple.
So how can you tell if your salary puts you on corporate America’s fast track?
There are some rough guidelines you can turn to, but be warned: They apply to an ever shrinking number of workers in a steadily dwindling number of industries. For the most part these days, salaries can be meaningfully compared only within narrow industry and professional groups.
For starters, the measurement does not apply to teachers, government workers, entertainers of all types and factory workers. Even those to whom it does apply are not easily compared.
For example, can you really equate some hot-shot 30-year-old investment banker on Wall Street with a rising star of a consumer product marketing group or a brilliant engineer at a software publishing house of the same age? Clearly, the results wouldn’t be fair or reasonable.
Nevertheless, Webb Bassick of Hewitt Associates, a Chicago firm that specializes in compensation analysis, does offer some benchmarks if you are truly determined to measure your job success by your compensation.
These guidelines, he says, apply only to the top 25%--the real fast-trackers--of white-collar staff and sales workers in the nation’s Fortune 1000 companies. According to his rule of thumb, fast-trackers should be earning twice their age, not including the bonuses, stock options and other incentives that become an increasingly important piece of the compensation pie as the worker ages.
A 30-year-old should be making at least $60,000 a year in salary, plus at least 10% more in bonus payments and stock options with a face value of an additional 20%. To stay on the fast track, a 40-year-old would have to make $80,000, with bonus payments of 20% and face-value stock option awards of an additional 40% to 50%.
For a 50-year-old, the $100,000 salary would have to be augmented with a 30% bonus, face-value stock options worth 60% of salary and a retirement plan that possibly includes some restricted stock purchase opportunities.
As you can see, as workers grow older their annual salary becomes a smaller piece of their overall compensation.
As we stated earlier, this formula can’t apply to everyone. And, as a society, we should be glad it doesn’t. Some of the people on whom we depend the most--notably teachers, nurses, police officers and firefighters--would fail such a fast-track test.
Perhaps more important, such fast-track measurements overlook two key components of any job: fulfillment and satisfaction.
Tax Ramifications on Repaying 401(k) Loan
Q: I am about to take early retirement but have an unpaid loan balance in my 401(k) account with my employer. I want to take money from my individual retirement account and repay the loan. Obviously, I do not want to incur any penalties or taxes. The employee benefits department at the office says, “No problem.” Is this right? --Y.F.
A: The only way you can repay your 401(k) loan balance is with “after tax” money. This means that if you use money from your IRA to repay the loan, you will be required to pay income taxes on the IRA disbursement.
And, if you are under age 59 1/2, you will be hit with a 10% early-withdrawal penalty from the federal government and a 2.5% penalty in California.
Mandatory Withdrawal Rule on IRA After 70
Q: My question concerns mandatory withdrawals from individual retirement accounts. I turned 70 in July. I will be 70 1/2 in January. Do I have to start making withdrawals in 1994 or 1995? -- E.M.A.
A: The Internal Revenue Code states that you must make your first withdrawal by April 1 of the year after that in which you turn age 70 1/2. For you, this would mean that your first withdrawal would have to be made by April 1, 1995.
However, you must make your second withdrawal by Dec. 31, 1995. So if you wait until 1995 to make your first withdrawal, you will be required to take two distributions that year. All subsequent withdrawals must be made by Dec. 31 of each year.
Home Sale Exemption for Resident Aliens
Q: My wife and I are both permanent resident aliens. Are we entitled to the $125,000 onetime exclusion of profits upon the sale or our home, or is this benefit available only to American citizens? We are over age 55 and have owned and lived in the home for the last eight years. -- R.F.
A: Permanent resident aliens who regularly file U.S. income tax returns are entitled to the exemption; the law makes no differentiation based on citizenship.
Anyone seeking the exemption must meet the age qualification, 55 years, and have owned and made the home his permanent residence for three of the last five years.
