When it comes to traditional retirement plans, you've heard it a million times: To develop a comprehensive retirement plan, you need to figure out your goals and develop the best strategy to help achieve them. Investors often define those goals only in terms of what they want to accomplish personally and financially. While those are two important pillars of a strategy, a comprehensive retirement plan will not stand on those two legs alone.
Given people's lifetime career paths have evolved, it's more important than ever for investors and advisers to make career choices a part of the planning process. The career landscape has undergone a dramatic shift from a lifelong employer system to one where holding multiple jobs throughout the course of your professional life is both common and encouraged. A recent LinkedIn study noted that job-hopping in the first five years after college has nearly doubled in the last 20 years. When you consider that today, 90% percent of an average American's net worth is accumulated after age 40, moving from job-to-job, changing or interrupting careers early in professional life is a lot more understandable.
Because of that change, professional considerations play as big of a role in an investor's long-term success as personal or financial goals. They have a tremendous impact on long-term retirement strategies and earnings, and including them during the planning process makes it easier to develop the right plan.
In response to this reality, my firm, McAdam, created the Advanced Advisory Model™ to specifically address all three aspects of an advanced retirement plan - personal, financial and professional decisions - and make them equal drivers of retirement-planning strategy. After years of experience and careful research on the most common career decisions, we've identified five distinct career paths and how their unique characteristics and challenges can shape your retirement.
These are contract workers, or professionals who choose to regularly move from job-to-job, spending a few years at each company before deciding to move on to a higher salary, different location or new challenge.
- Planning Challenge: Portability Problem.
- Advanced Strategy. After changing jobs, hoppers need to simplify their accounts into something they can control and that provides them with the freedom to choose their investments. Simplification is important for job-hoppers because they frequently carry lost vestiges of old benefits - for example, multiple retirement accounts - and tend to ignore those accounts as they pile up over time. In fact, according to Aon Hewitt, 30% percent of retirement accounts are lost because participants forget they have benefits or the plan administrator can't locate the former employee. Privately purchasing some of the additional services that may change or disappear between jobs - life insurance or disability - also gives job-hoppers ultimate portability.
Either by choice or by circumstance, this professional is taking time off from the workforce for an often-undetermined amount of time. Examples include stay-at-home parents, laid-off workers and those going back to school to earn advanced degrees (for example, MBA or Ph.D.) and designations.
- Planning Challenge: Time Frame Turmoil. Whenever someone enters an indeterminate period of unemployment - for example, to have and raise children - the uncertainty about the length of that period creates some issues. Is it a two-year decision, 22-year decision or somewhere in between? The answer has a long-term impact on both earning power and saving power. The longer a person is out of the workforce, the more unpredictable earning power will be once he or she returns. The challenge becomes more complex for married couples - especially ones with children - with different benefits to balance and less income with which to work.
- Advanced Strategy. Pit-stoppers need to put in place solid risk-control measures in case the estimates about either the length of their time out of work or the use of resources during that period are miscalculated. These measures can include more defensive money management, downside protection (e.g., fixed annuities) or overall reduction of risk. Working with an adviser on a long-term financial plan can ensure that there are no cash-flow issues while the pit-stopper is out of work, and can help families evaluate the impact of their decisions on a real-time basis. One of the best things for the pit-stopper to do is calculate a capital needs goal with a keen eye toward what the family will need and what everyone is giving up. Regardless of the situation, pit-stoppers should err on the side of planning for more time off rather than less.
3. Career Changer.
This would be a professional who decides after some time in one industry to change careers in order to find something more fulfilling, lucrative or enjoyable.
- Planning Challenge: Investment Inexperience. Career changers are often entering unfamiliar territory when they enter new industries. They're working with incomplete information about the different career trajectories, and may not be aware of what they don't know. The same thing is inherently true when it comes to salaries and benefits - and how to effectively use both. Salaries and benefits can fluctuate between industries (e.g., corporate vs. non-profit), which creates a higher level of individual responsibility for employees in managing and investing their own finances. Career changers have the propensity to take those salaries and benefits for granted, and in the process may underestimate or not fully understand the impact of their change.
- Advanced Strategy. People may see a higher salary in a different industry and think the raise beats everything. However, unintended consequences follow when career changers disregard other factors and benefits that they might not get in their new job. Maybe their employment status changes - for example, full-time vs. freelance - and the benefits aren't as good or are nonexistent. That creates an additional cost that could outweigh the bump in salary. Another example: In the new era of corporate finance, companies have created more defined contribution plans instead of defined benefit plans. That has shifted the burden of market returns to employees, who are now absolutely responsible for their own investments, and consequently, their own investment mistakes. Career changers need to speak with their advisers about the total costs of starting a new career, and look at key financial planning areas where mistakes most often occur. That usually also includes a discussion about the benefits they'll no longer have.
A professional, with or without industry experience, may want to start a business, invent and market a new technology or service or get involved in a start-up.
- Planning Challenge: Responsibility Requirement. One thing new business owners can count on: Everything that they benefitted from as an employee is gone. They are responsible for acquiring the capital to build a business from the ground up, hiring new employees, making sure those employees have benefits and saving for their own retirement on top of that. The process is overwhelming, and immediate issues like installing retirement and health care programs may slip through the cracks - even though some can be tax-advantageous.
- Advanced Strategy. Entrepreneurs and business owners are going to defend their businesses, and their natural inclination is to sink 100% of what they make back into the business. An adviser's job is to be the counterweight, and defend why the entrepreneurs started the business: to extract value from it. Business owners have different programs available to them that can create significant tax advantages. Non-qualified retirement plans, like deferred-compensation plans or split dollar insurance programs, are more flexible and often less expensive than 401(k) plans and can sometimes be tax deductible. Business owners can benefit long-term from balancing the use of these programs with an eye toward the cost net of taxes.
Some professionals take a more traditional career path, staying with one employer for an entire career with no desire to leave and working their way up to manager, director or managing partner. Loyalists may also acquire advanced degrees or industry certifications along the way.
- Planning Challenge: One-Hit Wonder. For professionals who spent their entire careers at one employer, they often have major assets invested only in the company - either through stock options or sponsored investment plans. That said, they often lack the experience and knowledge to make key investment decisions leading up to retirement. Their challenge is straightforward, but no less difficult than the other career paths: They need to make sure that the any complicated and irreversible decisions don't cause an uncomfortable retirement.
- Advanced Strategy. Loyalists need to understand the different options available to them if they still have pension plans - even if they're frozen. Upon retirement, employees need to elect how the pension will be paid out - life-only, joint benefit or something else entirely. "PenFlex," or pension flexibility, creates a best-of-both-worlds opportunity. Through creative use of privately purchased life insurance, loyalists can potentially opt for higher payouts while still protecting their spouses. Loyalists should carefully evaluate their options with their company-sponsored plans and then figure out which vehicles can help support them and their families through retirement.
The typical American spend about 40 years in the workforce, often putting in long hours to someday be able to reap the fruits of their labor. However, the typical American rarely fully understands the impact of their careers on retirement decisions. That's ultimately where financial professionals can help the most. Not only do professionals need to adjust their clients' portfolios based on where they project their career going, but they also need to be able to pivot if the trajectory changes along the way. Balancing professional decisions with personal and financial decisions is a critical aspect of retirement planning, and it needs to be part of the process from Day One.
Phil Simonides, CFP®, is Senior Vice President at McAdam, where he oversees the firm's Washington, D.C., metro, New York City metro and Boston offices.
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Copyright 2017 The Kiplinger Washington Editors