Work transitions are an excellent opportunity to assess your personal finances and bring about change. However, the advice you get from Wall Street isn’t always in your best interests. How do you make sure that you’re making the right decisions with Anadarko change of control package?

Oxy purchasing Anadarko has been the talk of the town. While it is sure to bring many changes, one of the most impactful changes for employees are the COC severance packages offered to the two merging workforces. In this post, we’ll discuss two moves you should make as well as the two that you shouldn’t.

If you’re rolling over your old 401k, pause.

You’re going to get solicited by several investment companies offering to help in this transition. Almost all of them are calling because they want you to roll over your 401k so they can manage it. As you approach retirement age, it can make a lot of sense to roll over old workplace accounts to an IRA. And while I certainly do not endorse approaching retirement age with several different 401k’s, rolling your 401k over to an IRA should be done with great caution. Here are some reasons why it could be a bad idea for you:

  • You’re still in peak income-earning years. If you’re taking a severance package but planning on continuing to work for another decade+, press pause on the rollover. First, assess your income moving forward. If you’re married and your potential income will approach $200,000 or more (single? lower that to $122,000), you want to be thinking about backdoor Roth IRA contributions. For many, backdoor Roth contributions should be the first place you save after a 401k & HSA. Having assets in a traditional or rollover IRA thwarts your ability to complete backdoor Roth contributions. If you’re in an excellent 401k plan with low-cost fund options, you may be better served by keeping your assets where they are.

  • You’re not yet 59.5. Are you planning on retiring immediately after taking the severance? If you’re under 59.5 years old, slow down before moving your assets out of the 401k. If you separate from your company in the year that you turn 55 or later, you’re allowed to take distributions from your 401k penalty-free. You’ll still need to assess your income tax liability, but you avoid the 10% early distribution penalty. Rolling over your assets to an IRA means your penalty-free distribution age is 59.5, not 55.

  • The enormous fees that await you in the IRA. Wall Street gets excited when they talk to someone who can rollover their old 401k. Why? For most firms, that’s the only way they get paid. The enormous majority of investment firms bill clients through a percentage of the assets they manage. Why is this a problem? See my post on why this is wrought with conflicts of interest. In short, it means you can’t work with most advisors while keeping your money in your 401k (see the 1st bullet point above). Charging this way also ignores the more important aspects of your financial plan (think estate planning, tax planning, risk management). And finally, it’s a problem because if you are at retirement age, the fees that await you inside of the IRA can be enormous.
    Let’s pretend that you are ready to retire, and you’ve saved somewhere between 1-5 Million in assets. We’ll settle on 2 Million. Wall Street’s typical asset fee is 1%. In addition to this charge, you have to pay for the investments they put you in. According to this benchmarking study from Michael Kitces, the average all-in cost (advisor ~1% + fund fees) is about 1.4% for a $2 Million portfolio. That’s $28,000. Not just this year. Or next year. $28,000 every year. This standard fee can cost you 1/3 of your entire portfolio throughout your retirement. Jack Bogle pointed this out in what he calls, “The Tyranny of Compounding Costs.”
    Think about this. You’ve spent four decades working and saving to build your nest egg. You’re the one providing the capital and taking on the risk in your investments. But the fees charged by Wall Street can wipe away 1/3 of your nest egg. Remember, Wall Street didn’t work for four decades, and they’re not taking the risk you are. So, no. I do not think they’re entitled to 1/3 of your money. And if you are paying 1%+, they better be combing through your tax returns, estate planning documents, and a whole lot more.

If you’re planning to retire without an income plan, pause.

Retirement planning doesn’t have to be overly complicated. I don’t think that every retiree needs an advisor to retire successfully. But you better know what you’re doing. Main reason? Retirement is a lot longer than it used to be. A small mistake becomes a big mistake when you extrapolate it out 25 years. As a financial planner, part of my job is to think through worst-case scenarios. Oddly enough, there are times when the worst-case financial scenarios are life’s best-case scenarios. Retiring before age 60 and living past 95 sounds great. That’s a fun scenario. Financially, though? That can be scary.

Ultimately, you can meet with your advisor to ensure that your income plan is up to snuff. But here are a couple of guiding principles:

  • Pay close attention to your withdrawal rate. Your withdraw rate is the percentage of your total assets that you withdraw each year to pay taxes and live off. There’s not an ironclad rule as everyone retires at different ages and has different lifespans. But 4-4.5% each year as a withdraw rate has been pretty close to ironclad if you’re planning on a 30-year retirement. For example, if you have $2,000,000, 4% would be $80,000 each year in addition to any social security, pension, or other income you have. Make sure you account for taxes and healthcare costs from that amount.

  • Pay even closer attention to sticking with a disciplined portfolio. If you’re going to retire using a withdrawal strategy that requires taking more than 3% of your portfolio each year, you have to maintain stock market exposure. Your portfolio has to provide for short-term needs (think income for the next 3-5 years) while devoting a significant portion to long-term growth. Current bond yields of around 2% are not going to set you up for income 15+ years from now. Begin to embrace the idea that volatility is not your enemy. And it’s also not the same thing as risk. A well-diversified stock portfolio is not risky to the long-term investor; it’s just volatile. Quick example: Let’s pretend that you have $1,000,000 and have the worst luck with the timing of all time. You invest all of it in US stocks right before the crash in 2008. Any idea what would have happened? Well, the next six months would have been brutal-you would have dropped to about $550,000. Any idea what it’s at today had you calmly staid put? About $2,500,000.

  • Executing on the first two points allows you to retire without an annuity. Annuities have almost become an expletive in finance. There are plenty of academically defensible reasons to use an annuity for retirement income. However, insurance salespeople can blur those lines in pursuit of a commission. As long as you have a reasonable withdraw rate and stick to a proper portfolio, you can do great without annuities. However, if you’re going to jump out of the market and “wait for a safer time to get back in,” you’re dead. You will wreak havoc on your finances in retirement, and you may be better off by purchasing a low-cost annuity.

Two things that you should do:

  • Carefully examine insurance policies that you can take with you. One of the most critical areas in your financial life is risk management. Specifically, your life insurance and disability insurance policies are essential to your wellbeing. Not only are they necessary, but getting approved for these policies gets harder and more expensive as you get older. In many employment transition situations, you can transfer these insurance policies without going through additional tests for evidence of insurability. One note on this-be careful as you transition policies. You want to make sure you have term life insurance, not whole life, cash value, or universal life, or any other fancy policy. While insurance is an essential part of your plan, you don’t want to pay drastically more than you have to with an expensive policy.

  • Shore up other areas in your financial life. If you’re taking a severance package, you’re in one of two camps. You’re retiring soon, or you’re going to work somewhere else.

    • Cash Flow Planning- In either scenario, creating more monthly cash flow by paying off debt can be of tremendous value. Remember, if you find a way to cut $1,000/mo off of your budget, that’s the equivalent of saving an extra $300,000.

    • Tax Planning-If you are taking the severance, chances are you could face a larger tax bill than usual. Proper planning around your next five years of deductions and charitable giving can save you a great deal.

    • Investment Review-How is your 401k (and any other investments) currently invested? Is there too much exposure in one stock (Oxy)? or one type of stock (think S&P 500)? With the record-setting decade we’ve seen in large US stocks, it’s time to make sure your portfolio matches your financial plan. If you’re not retiring anytime soon, don’t worry about the frothy market, but make sure you have proper exposure to international stocks. If you are retiring soon, it is probably time for a checkup.

    • Estate Planning Lastly, estate planning is critical. Most families haven’t done it, or it’s out of date. Take some time to make sure that you have a plan in place for your assets. I outlined my personal estate plan here.

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