Financial Planning for Young Oil and Gas Professionals

Quick Overview – For young oil and gas professionals, Good decisions and bad decisions are amplified in your 40’s because of how much time you have. It’s critical not just to know what compound interest is, but understand how much it will impact you. Takeaway: Be vigilant to put your dollars to work where they can earn higher returns. Be very cautious about putting money in low return vehicles (permanent life insurance, cash, bonds, etc.)-Be intentional about what you want in life and what financial freedom means. For many O&G/petrochem professionals, you have the ability to amass wealth faster than most. If you want to work until 65, great. But what if you’d rather retire at 45 and can work part-time for another 20-30 years? You can do that.

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-Defense: Make sure your estate plan is in order. A proper estate plan protects your children and spouse. Make sure you’ve insured the risks in your life that need and can be insured.-Offense: Invest regularly, stay in the market (never try to time), diversify globally. Have a plan in place for whatever you want retirement and college funding to look like. Make sound long-term tax decisions.

Prefer video of me talking through these ideas? Here you go.

I am a terrible road-tripper. We’re in the stage of life where driving is easier than flying. We have three kids, and we are rarely traveling more than 10 hours away. And flying with three young kids is really miserable anyway. We are usually driving to one of three places: Kansas City (I’m from there), Dallas (my wife is from there), and Rosemary Beach (favorite beach).

I ask way too much out of my wife while I drive. When we hit traffic, I immediately expect Lauren to be on her phone, devising some way to take an exit, drive on some county road for 5 miles, and jump back on the highway and skip the traffic. Well, one time we did this, and I took a wrong turn. It added an hour to our trip.

Almost a decade ago, I was on a road trip with a friend, we took a wrong turn, and didn’t realize it for hours. We added four hours to our trip.

The thing is…when you’re 700 miles away from your destination, one wrong turn is an enormous difference.

That exact same rule applies to your financial life in your 30’s & 40’s.

Have you ever gone through a simple financial planning software that spits out retirement projections? Even if you’re 50, you might run a projection assuming good market returns and a lifespan until age 96. The result? Congratulations! You will pass down $40 Million to your children! But if you change the inputs to a poor market, you’ve run out of money by age 82. How is that possible?

The software isn’t wrong. It may not be helpful to your financial life in any meaningful way, but it isn’t wrong.

The exciting thing about being in this stage of life is that you still have enormous leverage. Time is leverage. Great habits over a long time can do wonders. Bad habits over a long time can destroy you.

The question I have heard more than any other is this: “Am I in a good position financially?” often they would add “relative to others my age” The problem with that question, even if you’re 64 and about to retire, is that it’s static. If I’m helping you make great financial decisions for the next 30 years (retirement) or especially the next 50+ years (if you’re younger), I’m not overly concerned with your current financial position right now. I’m much more concerned with the direction you’re moving in and how fast you’re going in that direction.

Financial Planning has about five areas that matter-estate planning, insurance, retirement planning, investments, and tax planning. The CFP® Board has a separate course for each of those. I could simplify it and say there are two areas in your financial life: Offense and Defense. So, you’re in your 40’s (or close). You’re convinced that the difference between good financial decisions and bad is enormous. So, here are some things young oil and gas professionals should think through.

Life Planning

At its core, financial planning is using the five areas listed above to give you the life you want. Real financial planning is a tailored plan to provide you with the financial freedom you desire most. For some, that’s working full-time until 65 and then never working again. For others, you may want to take sabbaticals-maybe a year off every 5-10 years until 65-70. Maybe you want to give your kids an experience living overseas. For others, you may want to retire at 45-50, but work part-time until 70+. For others, your biggest desire might be something completely different, whether that’s to maximize charitable giving, live in a particular location, etc.

For my wife and I, we try to ask the questions, “What is it we’re trying to build with our lives? What do we desire?” That’s the best way to summarize financial planning–simply using your money to build the life you want. As I wrote a few weeks ago, most major Oil & Gas professionals have significantly different benefits than other industries. Company 401k match, stock plan, and pension contributions can make it to where you’re saving 25-40% of your income every year, even though you might personally only be putting in half of that amount. What’s my point here? If you, or your spouse, are in a job you don’t like, you don’t have to do that until age 65. If you’re earning an excellent income, and you’re saving a third of it every year for four decades, you really might get to 65 with $5-10Million or more. If that’s what you want, great! Let’s optimize your plan to get you there. But if you would rather get to $1-2Million and then transition to part-time work that you enjoy more while providing enough to cover expenses (without the 35% savings rate) until age 65-75, that’s great too! See more about this in “Retirement Planning” below.

Financial Planning: Offense

Investments. Brownlee Wealth Management is a Registered Investment Advisor. As such, the simplest way to communicate what we do when we manage someone’s assets is this: We are building and maintaining a portfolio that puts you in the best possible chance to meet your goals and get the outcome your financial plan requires.

I could include investments in both offense and defense. So, it is good to ask yourself, “what is the worst-case scenario with my investments?” If you’re in your 40’s and planning to work for decades longer, a market crash is not the right answer. Having way too much exposure in your company stock could be the right answer. Bad things happen to good companies. Most advisors suggest staying at or below 5% of your investable assets in one single company.

How about inflation? That should be one of your biggest fears. I don’t know if stocks will continue to grow double digits every year. I do feel confident, though, that they will continue to earn substantially more than bonds and cash over the next 20 years. Another way to put it? One of the worst things that could happen to your financial life is that you miss out on substantial gains over the coming decades. You will be very tempted to put your 401k in cash the next time you think a market crash is coming. Don’t do it.

How can you maximize your chances of seeing great investment results?

• Don’t limit your portfolio to large US companies (S&P 500). From 2000-2009, the S&P 500 (largest 500 stocks in the US) infamously earned just 1% per year. It’s known as the lost decade. Well, a “lost decade” or at least a “lost few years” happens all the time all over the world. I’m pretty confident we’re about to see a “lost decade” or “lost few years” somewhere in the world. Maintaining exposure to small caps, developed international stocks, and emerging market stocks ensures that you’re not putting all of your eggs in one basket. Plus, the last ten years were great for US large stocks and not great for international/emerging markets. As a result, there is a lot of value to realize overseas potentially.
• Embrace market crashes without selling out. The market has provided returns around 10% compounded annually for about a century. Still, a 14% decline at some point in the calendar year is perfectly commonplace. Think about that. In order to get 10% each year, you had to live through painful drawdowns that happened almost every year–and some of them were absolutely brutal! I want you to embrace a totally different mindset. If you’re in your 40’s, a market crash can be a blessing. You’re probably buying into the markets every two weeks with your 401k. Honestly, the best possible thing that could happen to you is a crash followed by 15 years of low returns. You would buy into the market for years (during peak earning years) at amazing prices.
• Think in decades and truly understand compound interest. You probably look at this and think it’s kind of an elementary idea. Well, you’re right. Still, the difference between earning 5% and 7% on your money between now and age 65 is wild. Now check out the difference between 5% and 7% between now and 85. That’s how big of a deal compound interest is. That’s also why not paying exorbitant investment fees is way more impactful than most realize. How do you put yourself in a position to earn more? The simplest way is to limit your investment in asset classes that have lower expected returns over the next 20-30 years (bonds, cash, insurance products) and maximize your investment in asset classes that have higher expected returns (real estate and owning businesses). Notice I said “owning businesses” instead of stocks, because that’s exactly what it means to invest in the stock market. Want to go even further? Make sure you have exposure in parts of the market that have shown the potential for higher expected returns-value, small-cap, and profitable companies. I’m a fan of Dimensional funds for that reason-they give you broad exposure to the entire market at a low cost (similar to an index fund), but tilt towards those dimensions that historically have produced higher returns.

Retirement Planning. Two thoughts here. First, retirement planning involves a robust plan to utilize every potential tax benefit possible in the best way for you personally. I cover that here. Second, retirement planning is a lot of what I mentioned at the beginning under “Life Planning.” A CFP®️ professional can help you plan for the type of retirement you envision. Take a look at the picture below from Michael Kitces.

Retirement planning traditionally has been the top option. This is great if that’s what you want. But you’re not bound to it. The idea of getting to $1-2Million at 45-55 and then working part-time works. Why? Because you’re not dipping into that $1-2Million nest egg until 65-75. Understanding the retirement timeline from age 55-75 is critical. If you’re wanting an early retirement with part-time work, your asset trajectory might look more like this:

As you can see, it’s a tradeoff (except the portfolio value for Oil & Gas professionals is likely larger). An extra 10-15 years working full-time with a great income and excellent benefits is obviously worth a lot. Working part-time and having more freedom is also worth a lot. Pick which one you want, just make sure you have a plan in place if you’re choosing the early option.

College Planning is another pertinent area for this demographic. 529 plans are an excellent tool to see tax-free compound growth. You get the most leverage when you invest early in them. For example, if you want to send one child to school at an expected four-year price of $100,000, putting $20,000 in a 529 invested in equities at birth might just get you pretty close.

It’s certainly not a bad idea to fund 529’s at a level near, but not excessively above, your expected education expenses. If you have one child, I’m more excited about being $10,000 short and cash-flowing it than saving $50,000 more than you’ll need. The tax-free benefit of 529 plans is only applicable to expenses related to education. If you have multiple kids? Not a problem if the first is overfunded, you can simply change the beneficiary to your next child.

Tax Planning. I’ve covered tax planning in detail both in terms of where you should be saving. (see the link in the Retirement Planning section above). And, I’ve covered it with charitable giving. In short, the main idea is that you obviously want to maximize your tax return each year. But we want to go beyond that-you want to position your assets and structure your deductions so that you’re paying the lowest possible tax bill over the next 10-20 years and beyond. Small things like maxing out your HSA and backdoor Roth contributions may not feel like a big deal. After all, you can’t stash 10’s of 1,000’s away in them each year. But, 20 years from now, you will be ecstatic if you have a few hundred thousand dollars that’s compounding tax-free every year.

Defensive Financial Planning

Part of my job is to think through the question: “What is the biggest threat to your financial well-being?” We have to understand the worst possible scenarios and how they would affect you. Then, we can plan for them and mitigate the ramifications. I’ll touch on three points here: estate planning, insurance (risk management), and avoiding bad financial advice.

Estate planning has a legal side and an organizational side to it. You can read how I set up my estate plan here.

Quick story-a couple of years ago, I was diagnosed with Non-Hodgkins Lymphoma. We absolutely did not see it coming. My wife had given birth to our third child 14 days before we found out. It was grueling. It was a worst-case scenario. Fortunately, treatment for my particular type of cancer is very effective. It’s not fun. But it’s very effective.

I’ll admit a financial mistake of my own here-we hadn’t set up our estate plan yet. I’m a CFP® professional, I know I’m supposed to (it’s even one of the courses you take in the CFP® curriculum), but I put it off. We quickly got it done while I was going through treatment. We set up health care proxies, Power of Attorney, and a Revocable Living Trust. Why a living trust instead of a will?

A proper estate plan protects your family. If something happens to you and your wife, all of your assets and your life insurance proceeds will be the legal property of your children the second they turn 18. I think I have pretty great kids. I’m sure you do too. But I don’t want them having unguarded control over a bunch of money when they’re 18. Our trust designates someone to oversee the assets until our children reach their thirties.

Insurance has two areas I want to address. First, you need to make sure you’re adequately covered for everything that could happen. Auto, home, life, health, disability, umbrella, etc. Whatever massive risk exists, let’s protect ourselves with insurance if that’s the best route. There are lots of examples where you eventually will be able to self-insure. But in your 40’s, you’re probably not there yet. Still, remember that idea, because that’s what you’re shooting for: being self-insured. Quick example, you may need $2Million in life insurance today to cover your family should something happen to you. But, 15-20 years from now, you should see some of the rewards of investing in equities for decades, and you should quit paying insurance companies every month. In addition to auto, home, and health (and any unique insurance you may need in your particular line of work) think through:

• Term Life insurance: If you have kids, you likely will need 7-15x your annual income. Even if your spouse stays at home, that spouse may need a small policy. If something happens to the non-working spouse, that will cause significant expenses over the next decade.
• Disability: You are much more likely to need disability insurance than life insurance during this stage of life. In my shoes, it was a huge blessing that my disability policy through work paid us while I was undergoing treatment. For many of you, having an “own occupation” policy is essential (disability=can’t perform your own occupation. “Any-occ” means you have to be disabled to the degree that there is no job you could perform to receive benefits). A policy that meets your monthly needs (especially long-term) is critical.
• Umbrella: This can be a tremendous defense if you’re sued for anything that happens in your house, car, etc.

Last note with insurance. Be vigilantly careful to stay away from excessively expensive insurance solutions — whole life, universal, cash value, variable, etc. There is a reason Dave Ramsey calls them the “payday loans of the middle class.” Also, watch out for “Term80” policies. They can get significantly more expensive as you get older. Sometimes insurance agents use them because they can convert it to a whole life policy later. Get a low-cost term policy from an insurance company with a strong credit rating.

The heavy majority of you should run from permanent life insurance. There are some academic reasons for it, but most of you will be far better off without it. Here is the best article I’ve found on them. But for most of you, spending several hundred (or $1,000’s) of dollars every month on a policy that will be negative for the first decade, and very low growth after, is horrible. It can erode your ability to create wealth.

Annuities? Similar boat. There are academic reasons for some to use an annuity. But, I run a wealth management firm for O&G professionals-most of which have way too much tax-deferred assets anyway. So, you likely don’t need one in your accumulation years.

Note: An experienced fee-only advisor should be able to help you figure out the best plan of action if you already own one of these products.

Avoid Bad Financial Advice. As I mentioned, a wrong decision in your 30’s&40’s can have huge ramifications. Specifically, if you buy an insurance product that you don’t need (for most of you that’s any form of permanent life insurance) or pay way too much for your investments, it can cost you millions. If you spend a few minutes googling the topic, you’ll probably find articles mentioning “fiduciary” and “fee-only.” Those are important distinctions. The heavy majority of “financial advisors” are licensed to sell insurance and investment products that pay them large commissions. This doesn’t mean they’re all evil. Still, it does mean you could seek out a financial advisor who might suggest that you buy an expensive permanent life insurance policy that may wreak havoc on your future financial freedom. Why? Because it may pay them a commission 10x more than a level-premium term policy (which is what almost all of you need). If you’re spending $1,000/mo on permanent insurance, you’re putting huge amounts of money in a vehicle that might earn 3-4% over the next 30 years. Even if the market struggles relative to history and only does 7%/year for the next 30 years, you’ve drastically lowered your long-term wealth.

That’s it! Have any ideas for blog/video topics I should cover? Whether it’s specific to your company (see my articles on Anadarko/Oxy-I’ll tackle ExxonMobil’s specific NUA opportunity and others soon) or a financial question in general, send me an email at justin@brownleewealthmanagement.com or schedule a quick call here.