Planning for Retirement Across Four Distinct Career Paths
When thinking about planning for retirement, most people consider how much they’re contributing to their 401k and IRA, how much Social Security they’ll receive and what investments will provide the best long-term returns. But how many consider how their career choices today may impact their retirement?
Your career can have a big impact on your ability to achieve your retirement goals, which makes it important to consider your career trajectory as you plan for a successful retirement. Following are four common career paths and the potential retirement planning challenges associated with each.
#1 – Traditional
In past decades, it was common for employees to stay with one employer for their entire career, working their way up from entry-level positions all the way to leadership roles. While remaining with a single company is relatively rare these days, there are still some employees who follow this traditional path.
Challenge – Concentrated stock holdings
Over time, employees who stay with a single company tend to accumulate significant company assets as they move up the corporate ladder. These can be in the form of stock options, in the form of restricted stock or within various employer-sponsored investment plans. The biggest retirement planning challenge many of these employees face is how to diversify their concentrated stock holdings. Being overly exposed to a single company’s stock can create significant risk, especially if something unexpected impacts the company’s share price. This risk is further amplified by the fact that your human capital — your skills, experience and income — are also closely tied to the fortunes of that same company.
If a significant portion of your retirement savings is in company stock, it may make sense to sell some of that stock and invest in a diversified mix of mutual funds or exchange-traded funds (ETFs). If you’ve reached age 55 or 59 ½ (depending on plan rules), you may be eligible to diversify stock held within your employer-sponsored retirement plan without triggering a taxable event. Doing so can be accomplished by completing an in-service rollover to an IRA.
Completing an in-service rollover, especially if it involves company stock, is a complex planning strategy that can have tax implications if not executed correctly — which is why it’s important to consult with your wealth manger before requesting a rollover.
#2 – Opportunity seeker
Today, it’s more common for professionals to seek additional opportunities by changing jobs several times throughout their careers. Sometimes, the opportunity-seeking individual changes careers or industries altogether in order to do something more fulfilling.
Challenge – Salary and benefits continuity
Opportunity seekers sometimes leave corporate careers with strong benefits packages in order to pursue their passions, which could mean starting a career as a freelancer or consultant. While these are great opportunities, it’s important to consider how your salary and benefits may be impacted (and, thus, how your ability to continue to grow and protect your wealth may be affected).
For example, if you leave a corporate career to strike out on your own as a freelancer, you may lose access to health insurance, a 401k plan and disability/life insurance. Will you be able to purchase these benefits on your own with the amount you earn freelancing? Is your spouse able to add you to their benefits?
Before making a career change, be sure to assess your new job’s potential impact on your retirement plan and current budget. Work with your wealth manager to revise your retirement planning strategy to help ensure it continues to meet your needs as you begin your new career.
#3 – Job hopper
Some people change jobs every few years in an effort to obtain a higher salary or take on a new challenge.
Challenge – Forgotten retirement accounts
Many job hoppers have multiple small retirement balances in several different employer-sponsored plans. It can be difficult to manage these various accounts, and some employees even lose track of their retirement savings if they haven’t worked for an employer in a long time.
If you’ve moved between several jobs over the course of your career, it may make sense to consolidate your retirement accounts into a single rollover IRA or even into your new company’s retirement account. If you choose to do so, it’s important to request a trustee-to-trustee transfer to roll over funds directly to the financial institution that holds your IRA. Although a rollover can be issued directly to you, if handled improperly, this can result in significant tax implications. Any assets distributed directly to you are subject to income tax and a 10% early withdrawal penalty if you haven’t yet reached age 59 ½.
#4 – Entrepreneur
Entrepreneurs face additional challenges when it comes to planning for retirement. Not only are you responsible for the day-to-day management of your business but you must also consider how to plan for retirement on your own. While you likely put a significant percentage of profits back into the business, don’t forget to also invest in your own future.
Challenge – Exit planning
Your business may end up being your largest retirement asset, which is why it’s important to understand its value and begin planning early for its eventual sale. How will you eventually exit your business? Will you sell it to an outside owner? Pass it on to a family member or key employee? Have a partner buy you out?
