Friday, June 19, 2009
Tuesday, June 9, 2009
Recently, my friend Paul Zaio and I were discussing the financial impact of job loss and career transition, and I asked Paul what the number one piece of advice he would giveto a professional in transition. Well, Paul has ten points of advice that we'll cover in this two-part series, and I hope Paul will contribute more often.
A little about Paul: Paul J. Zaio, CFS is a 17-year professional in the financial industry. He specializes in working with those who want to protect their principal and ensure that their money lasts a lifetime. He resides in Mount Pleasant, S.C., is a member of the LPL Directors Club, and teaches financial education at universities and corporations, and is a genuinely nice guy.
10 Financial Questions & Answers for Job Changers - Part 1 - One through Six
Getting you started on the next chapter of your life.
What’s the purpose of this blog posting?
Changing careers is a decision that deserves almost as much attention as starting a family, buying a home or retirement. Career changes can have a profound effect on both your finances and your lifestyle. That’s why it’s so important to approach a job change with three things: knowledge, goals, and a plan.
• Knowledge. In an era of forms and paperwork, changing jobs has become increasingly complex. There are many available options in regards to compensation and benefits, but many pitfalls as well. Knowledge of these is crucial to ensure getting the most out of both your job and future retirement.
• Goals. Changing jobs is not just about a new place of employment. It’s about living comfortably and well, about fulfilling your dreams and building a legacy. The successful job hunter sets goals that are designed to fulfill these objectives.
• Plan. Application of knowledge and reaching goals means having a plan. This report is designed to be the first step in creating that plan.
Below are ten of the most common and important questions you can ask regarding a job change – specifically in regards to how it will affect your retirement savings.
The accompanying questions are designed to be quick, helpful references to you as you begin readying yourself for new employment.
What do I do with it?
Some will use this as a handy reference from which they can always draw. Still others may use this as a kind of jumping off point – once knowing the kinds of questions to ask, they can then begin researching the answers with greater attention and thoroughness.
Finally, many people find that subjects such as 401(k)’s and IRA rollovers are easiest to manage with the help of an expert financial professional, someone who can advise them on everything from the proper investments to retirement planning to managing their existing assets. The choices are limited only by your own imagination.
A quick glossary of terms:
IRA – An Individual Retirement Account is a retirement plan that provides tax advantages for retirement savings. There are several different types, that may be either employer or self-provided.
401(k) – A retirement plan in which an employee chooses to have a portion of his wages deferred directly into a 401(k) account. The money in this account is usually tax-deferred, and most employers will provide a number of investment options that provide an opportunity for the employee to augment his savings.
Roll-over – A tax-free reinvestment or transfer from one retirement plan to another. For example, to transfer assets from a 401(k) to an IRA. Many employees, upon changing jobs, transfer the money from their previous employer’s retirement account to one provided by their new employer.
10 Questions & Answers for Job Changers - Part 1 Questions One through Six
1) What financial preparations should I make before changing my job or if I feel a layoff is imminent?
1. Stay up-to-date. Even if you aren’t actively seeking new employment, it pays to stay on top of your resume and talents. It’s the best way to both seize a sudden opportunity, and ensure your ability to bounce back swiftly should you suddenly need new employment.
2. Review vesting schedules. Double-check your retirement plans at your current job. Are you vested? If not, how much longer before you are? How much will the benefit be? This ensures that you leave your job at the right time – in other words, not a few months before you become fully vested. Knowing the right time to change jobs can guard you from the perils of a hasty decision – and potentially save you thousands of dollars.
3. Build a rainy-day account. Having cash set aside to help through your transition (no matter how smooth that transition may be) is a good idea, since you may go for sometime without a paycheck. In addition, that extra margin of safety can be a lifeline should your job be unexpectedly downsized. The last thing you want to do is find yourself unprepared and have to rely on high-interest credit cards to keep you afloat.
4. Educate yourself on finances. This report is a good first step, but one of the best things a job-changer (or pre-retiree) can do is continually educate themselves on finances. For example, research the best options for your IRA. Many people make the mistake of cashing out of their retirement plan when they leave their job. This creates a significant tax burden, and really sets your retirement savings back. It’s also unnecessary. When you move your money to an IRA, you control when and how much you take out because you now have direct ownership. It will also allow you to continue delaying taxes. Learning simple (but essential) facts like these are the best investments.
2) What about early retirement? How do I know if that’s an option?
The advantages of an early retirement are obvious. However, the financial challenges are significant, and should be carefully considered when pondering early retirement. The earlier you retire means the longer you must live off an income that does not come from a steady paycheck. Social Security is helpful but often not enough to provide the desired lifestyle. Early retirement means increased reliance on pensions and retirement savings. Thus, the only way to know if early retirement is right for you is to take a long, hard look at the numbers. Is your portfolio large enough to provide for 15, 20, 30 years of unemployment?
A person’s needs will vary, but do you know what your needs are? How much will your dreams cost? To find out, your best bet is to run a retirement budget alongside a tax-and-income projection with the help of a financial professional.
3) When can I start withdrawing money from my IRA?
The normal age at which you can begin distributions is 59 ½.
4) How do I handle a severance packages?
First you must decide how to receive your severance package, should you be offered a choice. If you would like to immediately invest your money, taking a lump sum is advisable. However, because severance pay is usually taxable, spreading out your package into multiple payouts make taxation easier to handle.
Balancing immediate needs versus your overall goals is also important. Paying bills or eliminating debt may be a necessity when receiving your severance, however it’s never a good idea to spend the entire amount. Allocate the minimum you need into your checking account, and the rest into conservative investments that will give you a higher return than a simple checking account. This balance will help you both use and grow your money should you seek a different job.
5) What are my options for the money that is in my 401(k) or other pension?
Usually there are four broad choices, each with different advantages and disadvantages:
- A. Leave it invested in what the company offers
- B. Annuitize and receive an income for life
- C. Withdraw the account balance, potentially pay a 10%penalty on top of taxes, and then invest the funds
- D. Roll over to an IRA or other pension fund, paying no penalty, and continue to defer the income tax.
An IRA offers the possibility of higher returns and increasing income potential. The account can be rolled over tax-deferred to a surviving spouse with the remaining balance distributed to beneficiaries at the death of the spouse.
End of Part 1. Part 2 Monday June 21st. Have a question for Paul? Leave a comment and he'll respond and as always, our thanks.
To learn more or contact Paul Zaio:
Paul Zaio, CFS, RIS
LPL Registered Principal / LPL Branch Manager
Securities offered through LPL Financial
A Registered Investment Advisor, Member FINRA/SIPC
1156 Bowman Road, Ste 200—Mount Pleasant, SC 29464
Toll free: 888-277-0095
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