About to Retire, Now What?

[INTRODUCTION] Bob: Welcome to Christian Financial Perspectives, a weekday program where we talk about ways to integrate your faith with your finances. This is Bob Barber. Mary Jo: This is Mary Jo Lyons. Bob: Are you ready to learn the truth about money from a biblical perspective? Mary Jo: Join us as we discuss what God’s word says about money and integrating your faith with your finances. If it’s your first time listening, welcome to the program and if you’re a returning listener, welcome back. [EPISODE] Bob: Proverbs 2:7, “All wisdom comes from the Lord, and so do common sense and understanding. God gives helpful advice to everyone who obeys him and protects all of those who live as they should.” Bob: Proverbs 15:22, “Plans go wrong for lack of advice. Many advisors bring success.” You know, Bob, I know we talked about this before, but I just love Proverbs. It’s like a little instruction manual on how to live life while loving God and just staying true to his commandments. I also find it fascinating as you look through the scriptures and we use different resources all the time and we discuss different versions of the Bible, they are all just worded a a little bit different. There is a difference that a few words can make. I dunno. I’m continually fascinated by that. I know I’m a broken record and you get tired of me. Bob: Oh no, I don’t. I never get tired. I never get tired of you , Mary Jo. Mary Jo: I’m glad to hear that. Bob: I totally agree. Proverbs is so sweet in that there’s 31 chapters and many of the months have 31 days, and you can read the chapter that corresponds to the day of the month. I tell you, Mary Jo, I read Proverbs so much to my children. They’re like, dad, do you know any other book? And I was like, yes I do. But you know, Mary Jo, I’ve never seen anyone hurt in life by following God’s word, especially in the book of Proverbs. I mean, it really tells you how to live life. Mary Jo: It does. What are we talking about today? Bob: I’ll tell you. So today we’re going to be talking about financial wisdom for pre retirees. You know, you’re thinking about, I’m about to retire maybe in the next year or two or three years now. Mary Jo: So maybe you’ve worked for a large company for 20 years, 20, 30, 40 years. You’re between the ages of 55 and 65. You’re beginning to think about retirement. Say you’re an empty nester or the kids or out of the house, so now you can kind of focus on your savings and what you need to do, but you’re maybe not sure what to do. And the thing is, you are not alone. There are so many people that are right there with you. Bob: So as you’re listening to our podcast today, think about this. Can you relate to some of this? You’ve worked for a major corporation, like an energy company or a large manufacturer or a technology company for many years. You’ve been really, you know, wise. You’ve not always spent everything you have. So what you’ve done is you’ve put a sizable amount in your company retirement plan like that 401k and now it’s accumulated quite a bit. Maybe you have a defined benefit plan, maybe even some company stock, and you’re just not sure what to do. You know, retirement’s on your mind. But you’ve got this 401k. You’ve got this pension plan. You’ve got this company stock. And how’s all this going to work together to create a stream of income for you for the rest of your life? And I tell you, Mary Jo, it’s just plain scary from what I’ve seen with people because making a mistake at this age, it just doesn’t give you hardly any time to recover. You can’t do it. You can’t make mistakes at this age. Mary Jo: Well, and that’s why I’m such a fan of planning. So, you know me, but I do think that’s what it’s all about. You know, Bob, recently I read this article that executives need to plan to keep planning. And it occurred to me that the statement, it’s not just true for executives, it’s true for everyone. It’s for all of us. And you’ve got time consuming demands on your career, your family, the complex nature of all your financial circumstances and the planning for your own future. It can be daunting. You know, where do I start? How do I approach it? But we’re here to kind of make the chaos simple and there are some steps you can take to just go through it. Just like anything else, I approach it very methodically. Let’s just take it one step at a time. Bob: I like that saying, “You need to plan to keep planning”. And you know, Mary Jo, situations can change so quickly today, especially with the volatile markets that we seem to have more and more today because of technology and the, you know, the robo advisers and all this computer trading that’s going on. Plus, a change in family dynamics or a health crisis that all of a sudden hits you out of nowhere. That can all change your situation very quickly as well. Mary Jo: And you know, that’s why it’s so important to work with a trusted advisor. One who shares your values – and for us it’s those Christian values that are so important – and that understands the complexity of all the moving pieces and parts of your financial life. That’s what we do here at Christian Financial Advisors®. We look at how they all fit together. We walk alongside you as you move through these stages in life, helping you make sense of the complex web of financial decisions that you face as you move forward. And we help you create peace among the chaos. Bob: And maybe you’re even one of these high level executives in a C Suite, meaning a CEO or CFO or mid level manager or an area supervisor or somewhere in between. You could have a complex earning package to sift through and maybe you’ve never thought of yourself as an executive, but still you’ve accumulated that sizeable amount in your 401k or stock options and you just need help figuring it out, how to navigate this transition. That’s where we are. We’re here to help you with that. Absolutely. Mary Jo: So how do you go from a paycheck provided by your employer to a paycheck provided by your own investments? And how does this fit with social security? When should you consider taking social security? You know, you’ve probably got a lot of questions and we have answers. Bob: So let’s try to get into some of those questions and get into some answers. And here’s what we see as some of the complex earning packages like base salary, maybe that’s higher than the national average and how do you handle that, bonus pay outs that can be fully or partially guaranteed or fully or partially discretionary or tied to a company performance or other metrics. I’ll tell you that’s a lot of wording in there, but we see that. Company stock, this can be a very complex topic which we want to talk more about in just a few minutes. Mary Jo: A lot of managers have deferred compensation. Those are typically longterm incentive plans. They can be tied to a noncompete agreement after retirement. So it’s a way to keep you from going to work for a competitor, and there are some things that you really need to consider in the timing of those payouts. I know my husband has that in his situation and he did have a noncompete. So as long as he doesn’t go to work for anybody else, some of what he earned in the past will be paid out and it’s in those years and that’s what we’re using to kind of bridge that gap between early retirement and your typical retirement age. So those are incentive deferred compensation plans and a lot of people have those so we can help you kind of figure that out. Bob: Now, Mary Jo, like in Mike’s situation, his noncompete agreement is only if he doesn’t go in the same field, he could still go to work. Like he could go to work for a major lumber company if he wanted to, right? Mary Jo: Exactly. Let’s hope he thinks about that. Mary Jo: Oh, he’s home 24/7 now. Bob: Well, I go to a couple of the big ones, but actually all three of them in my town every day it seems like, especially cause we’re building a house right now. My wife says, “Yeah, I could see if you ever retired,” which I’m never going to because my wife says, “No way will you ever retire, Bob. I will not let you retire. You’d drive me crazy.” But that’s where I would want to go to work with one of those major companies like that. But you know, there’s profit sharing and there’s lump sum pay outs. There’s accrued vacation. Boy, we’ve seen some big payouts here. You know, how’s that gonna hit you tax wise, accrued sick leave, and there’s just all these tax consequences to that. There’s employee benefits, knowing what is a portable taxation of each depending on who pays the premium, the employer or the employee. Just a lot of questions. Mary Jo: Bob, another thing to think about is the executive perks and the taxation of such. So as a general rule, the cost of providing executive perks results in taxable income to the executive, but it’s also deductible to the company. So that’s one of the benefits of why they do it. Bob: And you know, a lot of companies like these larger companies or even some smaller, private companies, they’ll offer some financial planning benefits for their employees. So you want to check with your company and see if they’ll even reimburse you for the cost of financial planning. Mary Jo: You know Bob, it’s so common. HEB is one of our biggest local employers here in Texas, and they have a benefit for their executives and their managers. The cost, it’s usually passed on as taxable income. There are fringe benefits including employee discounts, free parking, meals and lodging, and athletic facilities. So you want to look and see if those are available to you and if you are getting paid for those, how is it impacting you from a tax perspective? Bob: You’ve helped some HEB folks haven’t you? Mary Jo: Absolutely. Bob: Then you have this company’s employer’s stock, and you know you’ve got the executive’s interests that may be tied to the company. The company stock can be in the form of options. We’ve seen that, awards, restricted units, and that can get very complicated. Mary Jo, you know, we have a great CPA firm that we work with. They have one of their CPAs that understands all this complexity and we usually bring him into the meeting because you’ve got your vesting schedules, your tax consequences, how can you avoid this stock and other funds? Can you cash it out any time? Just so many different questions, but we’ll bring him in and get these questions answered. Mary Jo: One of the things you said I think is really important and something a lot of people fail to think about. If you’ve got a heavy concentration of stock options in your employer, then everything you have is tied to that employer. Your salary is coming from that employer. You’ve got the huge stock options and if you’re investing in your 401k in funds that own that company stock as well, think about how concentrated that is and if they have a dive in their stock price, it’s going to have a real impact on your financial future. So you want to be looking at all your exposure to that company stock and diversify, diversify, diversify. So, many employers offer a 90 day period for you to exercise any existing stock award grants once you leave the company. And it’s generally true for both you, if you leave the company voluntarily or if you let go or they’re bought out in. Sometimes, when you go through a corporate acquisition, your investing can be accelerated and you’re given the opportunity to exercise those rewards in a timely manner. Typically, as I said, it’s 90 days. You have stock awards when restricted stock shares vest, they are added to your W2 and are taxed as income. So, you want to be thinking about what else is going on in that year you’re planning to exercise those stock options. Are you going to get that lump sum pay out of your vacation and your sick days? That could really give you a big jump in your income that year. So maybe you could spread it out. Some things to think about. Bob: You know, here’s an interesting thing you’ll hear. We hear this a lot with somebody that’s worked for a major company and is getting these stock options is called “net unrealized appreciation” or NUA and that takes a lot of special tax handling, as well. So if you own company stock in your employer’s retirement plan, we encourage you to seek us out before liquidating that because that can be a complex issue and you really need to understand it, and we’ll help you to understand that Mary Jo: These whole stock options, it is a pretty complex scenario and if you are impacted by it, we definitely want you to really get some help in that regard. A lot of these are incentive stock options. There’s also non-qualified stock options and one of the things that we kind of think about when we’re looking at those incentive stock options, it might incentivize leaders in a company to take excessive risks and maybe do behavior that could lead to catastrophic corporate failure. We’ve seen it happen time and time again. Just think about this big company in Houston years ago, a big utility company. Bob: Oh, you can name it. They’re not publicly traded anymore. Mary Jo: Does Enron mean anything to you? But corporate malfeasance in order to predict the value of large pools of stock options, it happens all the time or more than we can imagine. So you want to be looking at that. Bob: And one of the many advantages of using a biblically responsible investment strategy, like we’re always talking about here on Christian Financial Perspectives, at Christian Financial Advisors®, we screen out these companies that have poor disciplinary records and who have bad corporate citizens. Mary Jo: I think that’s so important and something that we can help them look at for sure. It doesn’t impact everybody, but there is that potential for risk, and I really kind of want to stress that concentrated positions. Executives of major companies have a lot of eggs in that one basket. So when we talk about diversifying, we say that no more than 10% of your overall investments should be focused on that company. Your compensation is often tied to company performance, and your benefit package can include stock options and grants or employee stock purchase plans that could result in more concentration of your company stock, and your salarie is tied to that company as we talked about. And your future earning, your human capital, is also tied to that company. That’s another big chunk. So we really want to stress the need to diversify, and you might need help with that. Bob: So you know, Mary Jo, as we talk about this, we’ve talked about so many complex issues when it comes to this compensation package as somebody’s about to retire, which we start off if you’re about to retire in the next one to three years, it just goes to show that it can get very, very complicated. But we’re here to help you through all that. Mary Jo: And there’s also something that we want to talk about and that’s understanding your health situation. According to USA Today, a recent report from the Center for Retirement Research showed that 37% of seniors were forced to retire earlier than planned. This was due to poor health, employment issues, and family problems. So maybe they were laid off and couldn’t find a job, or they had elderly parents that needed help. You know, there were other family dynamics that entered into it. So an unexpected early retirement likely means you would have to retire with smaller savings. To avoid this, they recommend you stay fit and healthy and save aggressively at an early age. Bob: And understanding all of these employee benefits and retirement benefits, like what’s portable, what’s not, analyze your insurance needs in retirement. Do you need to maintain your disability or life insurance once you quit working? Life insurance needs are something to think about when you’re younger, but as you get older, things can change. You may not need as much, but then again, you may. So if you’re considering retirement before the age of 65, are you going to have access to retiree healthcare? And if not, who’s going to cover that expense? Mary Jo: Have you thought about inflation and how that’s going to impact your spending power over time? Charitable giving and philanthropic causes are also something we wanted to think about. For those higher income earners, the tax rates and capital gain grades make charitable giving attractive, but it’s also something that a lot of us want to participate in. We don’t have to necessarily be a high earner, but we all have giving goals and many executives, they’re wealthier now than they were five years ago due to the bull market. This could result in unrealized capital gains, especially in an after tax portfolio. So if you’ve been fortunate enough to be saving after tax and you’ve got some highly concentrated, highly appreciated positions there, you may want to think about a donor advice fund where you could donate those to the fund or a charitable remainder trust. Those are attractive options to help you manage the tax consequences of some of those appreciated stock positions. Bob: Another thing is retirement readiness. We like to look at “what if” scenarios to develop longterm goals and wealth optimization and tax strategies. Looking at your individual situation. So like at CIS wealth management, what we do every day is we use a planning software that’s very interactive. We’re living and breathing and once we get the basic financial information entered into the system, we can model a lot of different what if scenarios and look at those results. Mary Jo: Clients ask us, “Well, what if I want to retire earlier or work longer? What if I want to buy that boat now or maybe that RV and what if I want to take the entire family on a major expensive vacation or maybe an overseas mission trip? Can I afford to do that? Bob: Or what if we need longterm care insurance or go into a nursing home; can we afford that? Do we have enough? Mary Jo: Do I have enough to give more to my church or a favorite charity? Bob: So it really comes down to what are your replacement income options when you retire? The more you make, the more you will need to save to maintain that lifestyle you’ve gotten used to, and the older you get, the harder it is to replace it. Mary Jo: That’s true. And as we age in the higher our earnings are, the longer it takes to replace that same level of job. So there’s definitely more risks. Something to think about as well. Also tax planning – from research and strategy development to the preparation of your tax returns. A lot of companies here in South Texas, they have cross border tax issues for companies that are maybe from Mexico or you work in Mexico or you work in other countries outside. So those can create all kinds of complex tax situations that you may need help planning, and you might have some cashflow and debt management issues to work through. So we want to help advise you on budgeting and the appropriate use of debt as we age. Ideally, we want to wind down all that debt before we step away from our employment, and you might want to have your distribution, as we were talking about earlier, of executive compensation plans. When are you going to take what and how’s it going to impact you from an income perspective and a tax perspective? Bob: As we do this financial assessment, not everyone sees themselves as being retired when they retire because they have other goals in life. It may be that extended mission trip – we actually have a client that is on an extended mission trip and when I say extended, like three years – and they had saved enough to be able to afford that and it’s just a really neat thing and I talked to him just the other day and they were so excited about what they’re doing. Mary Jo: That is such a blessing for them to be able to do that. It didn’t happen overnight, and it took planning. The other thing we want to look at is estate planning. Most of us, we don’t want to give more to the tax man than we absolutely have to. So that’s a wealth transfer assessment, and women executives have their own unique needs. I don’t want to talk in generalities, but women tend to be givers and they might have significant charitable intentions. They also are more likely to be caught up in that sandwich generation. You know, they might have to be helping elderly parents. At the same time, they’re helping young adult children. They have some own unique needs, and we want to look at those appropriately. Bob: And then last, then get to the investment coordination. You know, Mary Jo, so many people put that one first. Mary Jo: There’s so much more to consider. It’s part of the puzzle but it’s only a piece of the puzzle. Bob: Yup. Cause every element of a comprehensive financial strategy needs to fit together with all those other components. It’s kind of like a jigsaw puzzle. It should all fit together. You need to coordinate and correlate all your investments, funds and managers across all these different investment strategies for retirement. Mary Jo: You know, Bob, I’ve heard so many people that they fail to look at it. I always think of it as like a crazy quilt. So you’ve got all these pieces and they all kind of fit together and they have all these crazy stitchings that adhere them to each other. But once it’s all said and done, it’s like a nice blanket that keeps you warm. It all has to fit together and that’s where you need help with a trusted financial advocate. According to DALBAR’s annual report, quantitative analysis of investor behavior, investors tend to consistently underperform the market due to emotional reactions to market volatility. Those that work with an advisor tend to do better than those that go it alone for this very reason. Having someone to help you navigate the many financial decisions that await you can help turn chaos into calm. A discipline process and a steadying hand to help guide you can be a difference maker. Bob: We’re here to help you with all this. So give us a call at Christian Financial Advisors® at (830) 609-6986 or connect with us on LinkedIn or Facebook and subscribe to this podcast. [CONCLUSION] Bob: You’re listening to Christian Financial Perspectives. Join us next week as we explore what God’s word says about money and don’t forget, you can sign up for our free newsletter at ciswealth.com or give us a call at (877) 71-TRUTH. That’s (877) 718-7884. To make sure you don’t miss any of our podcasts regarding the truth about money, be sure to subscribe to Christian Financial Perspectives at christianfinancialpodcast.com for free. If there are any specific topics you would like to hear more about, we’d love to hear from you. Mary Jo: That’s all for now until next week. [DISCLOSURES] Before deciding whether to retain assets in a 401k or rollover to an IRA, an investor should consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgements, required minimum distributions, and possession of employer stock. For a comprehensive review of your personal situation, always consult your legal advisor. Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely, those are the hosts Bob Barber and Mary Jo Lyons. Bob and Mary Jo do not provide tax advice and encourage you to seek guidance from a tax professional. Investment advisory services offered to Christian Investment Advisors, Inc DBA, Christian Financial Advisors®, a registered investment advisor.