Work transitions are a great opportunity to assess your financial plan and shore up areas that need attention. 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 during this transition?

We have already seen significant layoffs in Q2. Hopefully, we don’t see many more, but we may. In this post, we’ll discuss two moves you should make as well as the two that you shouldn’t. We’ll start with the latter.

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 separate 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 typically bills clients through an IRA. Firms cannot manage (and bill) a 401k. 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. As for actual cost, you are looking at five-digit annual fees if you have anywhere near $1 Million saved.

    • 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, Vanguard founder, 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? There are a lot of risks in that timeline.

I wrote a pretty comprehensive piece (and a video) here. But here are a couple of guiding principles:

  • Pay close attention to your withdraw rate.

  • Pay even closer attention to sticking with a disciplined portfolio with enough stock exposure to provide for income decades from now.

  • Executing on the first two points allows you to retire without an 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 financial plan. 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 permanent 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. And remember, the goal with life and disability insurance is to eventually not need it. As you approach retirement age, most of you should have enough assets to be self-insured.

  • 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 in retirement, that’s the equivalent of saving an extra $300,000.

    • Tax Planning- Your tax return is a retrospective activity. Tax planning looks forward. It addresses how to position your assets to pay a lower tax bill over the coming 10-20 years and beyond.

    • 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. For many of you, you are leaving your employer after decades in their 401k and pension. If you now have significant assets, you want to make sure you are invested properly. As I’ve written on before, an investment review isn’t something for your broker or insurance salesman. Seek out a fee-only CFP®️ professional.

    • 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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