Brad Tinnon

Brad Tinnon

Don’t Put All Your Financial Eggs In One Basket

At first glance, when you read the title of this blog post, you would naturally think that you shouldn’t put all of your “investment” eggs in one basket. While this is true, the reality is that there is more to it than that. Many people invest a large majority of their “financial” eggs with their employer. Read on to learn why this is so dangerous and 5 strategies that you can use to protect yourself!

There is no question that you should diversify your investments. This includes having money in U.S. and International investments; having money in large companies and small companies, having money in different industries, etc… This is known as asset allocation, but today I want to take a bit of a different angle on the diversification topic.

DANGERS OF HAVING FINANCIAL CAPITAL WITH EMPLOYER

Many of us have a lot of our financial capital tied up in our employer. This is very dangerous!

Imagine for a moment the different financial aspects that you have tied up in your company: salary, health insurance, 401k, employer stock, pension, stock options, other employee benefits, etc… One event could cause much of this to become completely unraveled. This event could be a job loss, fraud, a poorly managed pension plan, technological advances that render your company / industry obsolete, regulations that cause your company to be less profitable, etc… In other words, you could lose your salary, pension, benefits, and possibly your investments.

With that in mind, following are some ways that you can protect yourself from having all of your financial capital tied up with your employer.

5 WAYS TO DIVERSIFY AWAY FROM YOUR EMPLOYER AND PROTECT YOURSELF

1. Don’t Count On Your Company Pension.

When planning for your retirement, it’s tempting to think that you don’t have to save as much today because you expect to receive a pension in the future. This is especially true for public school teachers in Missouri. They have historically had a very reliable and robust pension plan leading to the false belief that they don’t have to save much today.

But if there is only one thing that you take away from this blog post, don’t buy into the security of pension plans!

I’ve read and heard about pension plans that were completely mismanaged and caused pension benefits to be significantly reduced or outright eliminated. But I’ve never experienced this with a client until recently.

One of our clients unfortunately recently lost her husband who was entitled to a pension through his employer. We’ve had multiple conversations with the pension company and have discovered just how poorly run the pension plan is. 

The plan is currently only funded at 37%. This means that there is only enough money in the plan to cover 37% of the pensions promised to employees.

To make matters worse, the pension company told us that the employer was penalized for taking money out of the plan. But the ironic part is that it appears to have been a penalty against the employees, NOT the employer since the penalty resulted in a reduced employee pension benefit.

In our client’s case, her husband received letters year after year stating that his pension benefit will be lower than expected. One of the letters even stated that he may not receive anything at all. This all translates to a minimal surviving spouse pension for our client. It is much lower than was initially “promised” to her husband. Furthermore, our client was told in a letter that the pension plan was expected to run out of money over the next few years. So, even though she is expected to get a small pension, it likely won’t last very long.

Don’t expect your pension to be there in the future. Instead take matters into your own hands today, and save enough money to protect against a mis-managed pension!

2. Don’t Invest More Than 10% of Your Entire Investments In Company Stock.

I have one word for you – Enron. Many people literally had their life savings tied up in Enron stock. Any number of things could cause a company to go under. In Enron’s case it was fraud. The unbelievable actions of Enron caused employees to lose everything – their job, their 401k, their health benefits, etc… Imagine those who were close to retirement. They likely had to keep working well beyond their intended goal.

Take precautions now to avoid disasters like this.

3. Maximize Roth IRAs (if eligible)

Don’t just depend on your 401k. 401k plans only give you a limited selection of investments from which to choose and usually is fully taxable when money is withdrawn. Roth IRAs on the other hand are tax free and allow you to select from virtually any investment within the universe.  

Note that you are not eligible for a Roth IRA if your modified adjusted gross income for 2018 is more than $135,000 (single) or $199,000 (married). There is; however, an awesome strategy that may be available for high income earners that don’t qualify for a Roth IRA.

4. Rollover 401k When Eligible 

I’ve heard that when Enron was going through it troubles that the 401k plan was actually frozen. Think about that for a second. This means that those people who had a high concentration of Enron stock in their 401k plans couldn’t even sell it. They were forced to watch it go down and there was nothing they could do about it. 

I don’t know if that story is true or not, but it does make you think that having control is a big deal. For that reason alone, we generally recommend that employees rollover their 401k to their own Rollover IRA when they are eligible. For more information on this subject, check out a prior blog I wrote titled Should You Rollover Your 401k.

5. Consider Exercising And Selling Your “In-The-Money” Stock Options.

I live in St. Louis, which is the home of Anheuser Busch. In July of 2008, InBev purchased AB. However, leading up to the buyout no one really knew what was going to happen with the stock price of AB. Fortunately for investors the merger resulted in an AB share price of $70 per share which was larger than it was trading at prior to the merger.

And many employees who had stock options were able to lock in a fairly large profit. However, this is not how things always turn out (see Point #2 above). If you have stock options that are fairly profitable, then consider exercising and selling the stock immediately to lock in the profit, especially if the stock options represent a very large percentage of your overall investment portfolio.

CONCLUSION

As you can see, there is more to your diversification than what you should be investing in. You must also be concerned with protecting yourself from having too much financial capital tied to your employer. One wrong move or untimely event could cause devastation to your finances and your goals could be completely destroyed. Take matters into your hands today and start diversifying away from your employer.

To find out how best to diversify your financial capital, contact us for a no cost Introductory Meeting!

If you’re new to our blog and want to receive financial planning tips and educational information, then sign up to receive our eContent.

Do you have any pension horror stories? How are you diversifying away from your employer? Please share any thoughts, comments, or questions below.    

Brad E.S. Tinnon
CERTIFIED FINANCIAL PLANNER™

 

RELATED CONTENT / RESOURCES: 

Our Investment Strategy

Your 1st Year As A Widow: Top 10 Things To Do Right Away

An Awesome Investment Strategy For High Income Earners Who Don’t Qualify For A Roth IRA

Should You Rollover Your 401k?

Handling Company Stock In A 401k

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