High-Income W-2 Trap: How to Go Broke Despite Getting Promoted to Managing Director
Level 2 - Value Investor
If I work hard, get promoted a few times i’ll be set for life by 40.
This is a common belief. We actually don’t knock it much since it comes from people who are around 20-22 years old or so. They worked extremely hard got into good colleges and their entire life has evolved around that belief. It has been true for 20+ years why would it be different in the future?
Good logic, until they enter the work force and see real life (politics, company performance and a lot of other items are far beyond your control)
How the Company Traps You
The days of multiple seats paying $1M+ are basically gone. AI/Tech/Software are being used to make a large number of seats redundant. If the entire position is called “execution” you know the clock is ticking. Front office execution roles are essentially glorified back office/support roles in 2025.
Is it going to happen over night? No of course not. It’s a slow bleed out.
Here is the new structure for how companies will hire: 1) initial screening - extremely high - they will only hire people they think will be promoted to heavy front office revenue generating roles, 2) the number of seats will be smaller as they shrink headcount to keep up with tech innovation and 3) they will overpromise everyone the golden goose seat knowing that less than 1/20 will actually get it.
From a compensation perspective this means the following:
You will be *overpaid* versus your profit margin to the firm on graduation day. Notice it says vs. *profit margin*. Corporations are not fools, they need to make money
You will see high wage increases in *percentage* terms for about 5-9 years
You will then hit the wall at around $250K
95% chance you’re stuck
In the 5% chance you break into the high-paying position, you will go *straight* back to the $250K floor if you are ever cut/laid off (80% chance of this happening if cut)
Majority Won’t See It Coming
The above is the realistic outlook for White Collar positions. If you want proof of this you have to track down people who get cut from high paying positions. Once they are out of work for about 6-12 months you’ll find a significant pay scale drop.
To hide this blow up as much as possible, suddenly everything is changed to years of employment without the month listed. This is to hide the gap in the resume. Anyone smart will know to avoid the people with years (not year + month) listed.
They get trapped because they see the 20% wage increase initially and they are upgrading their lifestyle from roommates to a nice one bedroom condo. Since they are getting praised on the way up as a future rain maker, they see no reason to build a plan B. They are all in on the Company (no different than being all in on a stock but according to normies having a job isn’t “risky”)
Okay So If I Make It to the Top Though I am Set Right?
Nope. Not really. This is a common fantasy as well. If I can scale the ladder and just have a “few good years” then I’ll be set. The reality is that died post COVID. A few good years is no longer enough. If you Earned $1M for 3 years in 2000? Sure. The average home was $163K. If you saved half your money you would have had $750K ($3M after tax is $1.5M half of that is $750K). That would be about 5 houses.
Wages have not gone up. In fact they are flat at best compared to 10-15 years ago. Meanwhile, asset prices have exploded
Run the same math: $3M income $1.5M to tax and $250K a year in living expense expense. Left with $750K, that’s 1.75 standard houses in the USA (a massive difference versus 5 homes).
But I could Just Save More!
Not really. The idea of cheap-ing to the top has been dead for years. It was popular in the 2010s during the stable years. Then we had COVID and suddenly the frugality bloggers died. It didn’t work. When inflation hit and prices went up 30% the spending floor rose. It went from say $50K minimum spend to $65K. Massive difference
Not to mention the increasing cost of life. You can try to fight some of it but it’s going to happen to you.
You will need to live in the good zip code for schools - if you have kids this is pretty much a lock
Won’t be possible to eat nothing but fast food and live in a studio
The idea of traveling abroad in anything but high-end hotels will sound gross
Since you’re in corporate you’ll be forced to bring in new revenue which means country clubs, high-end gyms etc. None of this is cheap or free
Here’s what baseline spending looks like:
$10,000/mo mortgage. This is pretty logical for a $2M home which is going to be common where all the high-paying positions are
$2,500/mo for car, utilities, property taxes, home insurance
$2,500/mo for general basic entertainment - going out, standard vacation,
$3,000/mo for food, gym, internet, cell phone, a cleaner/yard maintenance etc.
You’re burning $18,000+ a month before saving a cent. This is after tax income.
Unless you’re making at least $500,000 pre-tax, the chances of meaningful savings are slim to none. Not to mention: 1) the low chance of reaching this income due to standard attrition and 2) the low chance of retaining this income for a long duration of time. These are just statistical notes.
The treadmill is running but it’s a machine and doesn’t get tired.
The Job Loss Scenario
You survive a few years. You managed to save about $400K during the big years (last five or so). Now the company shuts down (see First Republic and Silicon Valley Bank and Lehman and Bear…. you get the idea)
Your role is eliminated since someone else is already in charge of the same sector, region etc. Doesn’t matter if you were a top performer. You’re out. The other guy is good enough and they use *you* as an excuse to pay *him less*. “Hey we could have split your stuff up but we’re keeping you due to loyalty, your pay is flat to down due to the acquisition costs of this dangerous asset”
You just went from high-six figures to $0. Mortgage? Still due. Living costs? Still hitting. Your vacations? Vast majority end up giving themselves a vacation to “get back into it later” which just eats into whatever measly severance they gave you (if any)
Panic Mode Sets In: Instead of having positive cash flow you’re in negative cash flow territory. This is incredibly taxing mentally. Don’t wish it on anyone (except for the haters of course).
The math gets inverted if you spent 75% of what you were making it means you were saving about 25% per month. If you no longer have income for *three-four* months it means you lose an entire year of savings (25% of a year is 3 months, since all months were negative its a good rough proxy)
If you remain on the beach for longer than a year, it means you will lose *more* than an entire year of savings. You’ll likely lose 2-3 years at minimum. Pain.
Then the Decline in Compensation: Unless you are fortunate enough to get cut during a hiring spree/bull market (whatever you want to call it), the expected decline starts at around 20% and goes down from there.
This is pretty significant as you’ll see it quickly eats into the baseline living costs for high-income people.
At $500K you’d be looking at $400K pretax as a near guarantee within 2 months
By 6 months you’re looking at $300-325K pre-tax
By 12 months you’re looking at a full 50% drawdown to $250K pre-tax
Go back and review the rough cost of living with a basic family + high paying prestigious career. As soon as you break below ~$375K you’re in the red! Time to make some big time decisions as it relates to quality of life.
No Guarantee of Peak Earnings Again: Typically, to get into the $1M+ club in a W-2 there is a combination of politics + talent involved. If it was truly talent only, you’re fine. If it was not, the second the political cards fall apart, you likely never see those numbers again. The -30-50% decline in compensation is permanent.
Sound Rare? Entirely Common.
The reason that upper middle class areas have a vibe of pins and needles is for this exact reason. Everyone is one slip up from disaster. A layoff, divorce or job loss could crumble the empire.
One year of not earning money is equivalent to losing multiple years of savings. It mathematically makes sense as most save around 20-25% of their income (if lucky). If spending is flat but income is zero or near zero (unemployment is meaningless), that would be at least a 3 year burn (75/25 = 3)
Guess what that means? If someone gets cut for a year or two, they will lose all of their savings from the high-earning years.
Put that into excel and now you know why practically no one is wealthy after a long career (even on Wall Street)
The Exit Plan
If you want to break free from this W-2 treadmill, the playbook is simple (but not easy):
Cap your lifestyle. The fastest way to do this is eliminating housing cost. Buy the smallest asset you can reasonably live in. If you have no mortgage and no rent, the numbers get much better.
Build cash flow. Use your income to build other assets. That $10K a year boring business selling stuffed animals online? Keep it. Get another one. If you have five of those, you’ve got enough money to cover practically all your living costs.
Buy time, not stuff: Anything you put your money into? Think about how much time you will get from it. Measure your savings in terms of time not percentages. If you save $$$ calculate how much *run-way* that gets you. This explains why tech investors obsesses so much about the topic. Cash runway.
Own equity or build it. A job is just something they give you to fund your exit. It’s the rockhammer in your book at shawshank. If you don’t use it to build equity you don’t have a plan. You have hopes and dreams.
You can earn your way into golden handcuffs. Or you can own your way to freedom.
Choose Wisely
Hit a nerve? It was supposed to. Excel doesn’t lie. Since the majority use it everyday, just plug it all in. One bad decision away from wasting years of life. Don’t let it be you.
We’ll consistently find new markets in 2025. Just like 2024 and the year before it. It’s always the best time in history to start a biz and exit the rat race. Just need to accept reality.
Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are *opinions* written by an anonymous group of Ex-Wall Street Tech Bankers and software engineers who moved into affiliate marketing and e-commerce.
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